Wall Street is opening a new trading week with a hangover. The market sentiment depends on the looming crisis in the banking sector, expectations of the Fed’s policy decisions, news on Credit Suisse, and soothing statements by regulators. Besides, the market is still affected by stubborn inflation and a recession threat. These pieces of the puzzle cannot fall into place. As a result, high volatility has settled in the stock market with the benchmark indices trading on a roller coaster.
The US stock market closed in the red on Friday amid the festering crisis in the banking sector. The three stock indices closed with heavy weekly losses. No wonder, the stocks of financial companies showed the worst performance. The Dow Jones lost 384 points or 1.19%. The Nasdaq sank by 0.74%. The S&P 500 shed 1.10% to close at 3,916.
The pre-market revealed that investors’ nerves were on edge. The benchmark indices traded lower in mid-day. However, they inched up in the New York pre-market.
Futures on the US stock indices traded mixed, wavering between -0.5% and +0.5%. The S&P 500 is expected to trade in the corridor between 3,860 and 3,980.
Friday was another gloomy day in the losing streak. The bank jitters escalated when SVB announced that it would seek protection from bankruptcy according to chapter 11. Concern over liquidity and the looming bank crisis aroused a painful response from the market.
Shares of First Republic Bank slumped by 32.8%. PacWest Bancorp tumbled by 19%. Western Alliance dropped by 15.1%. Credit Suisse shares traded in the US also closed with a sharp fall of 6.9%.
In the last two weeks, the S&P banking index and the regional banking index declined by 4.6% and 5.4% respectively. It is the worst two-week drop since March 2020.
All 11 sectors in the S&P 500 closed the week on the negative territory.
On Monday, futures on the US stock indices traded mixed and quietly. Over the weekend, UBS decided to buy its ailing rival Credit Suisse for 3.23 billion dollars in a merger deal brokered by the Swiss authorities.
Credit Suisse shares listed on US exchanges plummeted by 58.4% in the pre-market. UBS shares fell by 3.6% because the market shifted its focus to the blow delivered to some holders of Credit Suisse securities as a result of the merger.
Nevertheless, futures on the US stock indices rebounded from intraday lows. Hopes for less aggressive tightening by the US Fed supported the stocks of high-tech giants such as Apple and Microsoft, but optimism did not last for long.
From now on, market participants expect the US Fed to put interest rates on hold. Still, 39% of investors anticipate a rate hike by 25 basis points.
Ahead of the Fed’s policy meeting and the policy announcements on Wednesday, the market is likely to trade cautiously. A lot of factors are in question today.
Other major central banks acknowledged the risk of broader stress following the USB’s merger deal. So, the Federal Reserve, the ECB and other central banks made statements on joint measures to soothe markets.
The major central banks took such measures on Sunday to provide cash injections around the world. The US Fed suggested standing US dollar liquidity swaps on a daily basis. This should guarantee that banks in Canada, the UK, Japan, Switzerland, and the Eurozone have enough dollars for the operations.
With such measures, the monetary authorities underscored the gravity of the shock and its aftermath for lending capabilities, economic growth, and inflation.
Some experts consider the Fed’s lending via a discount window and liquidity provision to be a renewal of some quantitative easing. However, some banks, for example, Morgan Stanley, warned against such interpretation, saying that it would not interrupt monetary tightening and would not derail deposit cost growth.
Large American banks such as JPMorgan, Citigroup, and Morgan Stanley dipped by 0.2 – 1.2% in the pre-market.
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