US stocks climbed and bonds retreated on Tuesday, with regional bank shares leading the gains after the collapse of Silicon Valley Bank drove sharp declines in the previous session.
Wall Street’s benchmark S&P 500 index closed up 1.7 per cent, while the tech-heavy Nasdaq Composite added 2.1 per cent after fresh data showed that US consumer price inflation had slowed to an annual rate of 6 per cent in February, in line with economists’ forecasts.
Beleaguered bank stocks led the rally, with shares in First Republic Bank closing up by more than a quarter after earlier gaining as much as 63 per cent. The bank had tumbled 62 per cent on Monday.
The broad KBW Nasdaq Bank index was up 3.2 per cent. On Monday, it had fallen 12 per cent, with US regional banks plummeting most sharply despite President Joe Biden’s assurance that regulators would do “whatever is needed” to protect depositors in the wake of SVB’s failure.
“The contagion seems to be fairly limited, as the issues were created by a bank with little to no risk management,” said Neil Birrell, chief investment officer at Premier Miton Investors. “The authorities are stepping in and doing the right thing, so I don’t think the ramifications are as bad as they seem.”
However, rating agency Moody’s Investors Service on Tuesday cut its US banking outlook from stable to negative, citing a “rapidly deteriorating operating environment”.
Bond markets fell back following a historic rally on Monday as investors bet that central banks would slow their monetary tightening plans. The yield on the two-year US Treasury note, which closely tracks interest rate expectations and moves inversely to its price, was up 0.2 percentage points at 4.23 per cent following its biggest one-day drop since 1987 on Monday.
Tuesday’s inflation figures come after a series of data releases that pointed to a still-hot US economy.
But the failure of SVB and ensuing turmoil in the banking system have fuelled bets that the US Federal Reserve is likely to opt for a smaller, quarter-percentage-point interest rate rise later this month — or even pause its monetary policy tightening altogether — sending Treasury yields down and providing some support to equities.
Following the latest inflation data, markets are pricing in a roughly 75 per cent chance of a quarter-point rise at the Fed’s meeting that ends on March 22, with a 25 per cent probability of no change. Prior to SVB’s collapse last week, investors thought a half-point increase was the most likely outcome.
The February consumer price report was “unlikely to sway the Fed” ahead of its meeting next week, according to Silvia Dall’Angelo, senior economist at Federated Hermes.
“Following the stress episode in financial markets due to the collapse of SVB bank, financial stability is likely to rank as high as inflation among Fed’s considerations,” said Dall’Angelo. “We expect the Fed will hike rates by [0.25 percentage points] next week.”
Banks in Europe also steadied on Tuesday. The European Stoxx banking index closed up 2.5 per cent after dropping 6.7 per cent on Monday, amid concerns over contagion from SVB’s failure and that measures to shore up the US financial system would not extend to Europe.
The return to relative calm in markets came after shares of Japan’s biggest banks dropped sharply earlier on Tuesday as investors reacted to the previous day’s sell-off on Wall Street. Japan’s Topix Banks index tumbled 7.4 per cent, its worst day in more than three years, while the Topix fell 2.7 per cent. Shares of MUFG, Mizuho and SMFG fell between 7.1 per cent and 8.6 per cent.
In foreign exchange markets, the dollar index, which measures the greenback against six peer currencies, lost 0.1 per cent.
Brent crude, the international benchmark, fell 3.9 per cent to just less than $78 a barrel.
Additional reporting by Colby Smith in Washington
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