Choppy Market Amid Falling Yields and Investor Concerns About Regional Banks

U.S. large cap stocks eventually finished the week in positive territory though investors continued to worry about the health of the banking sector. First Republic Bank stocks (FRC) dropped almost 72% this week as news of fresh financing from a group of big banks failed to reassure investors. Financials remained under pressure all week long. Depositors who have grown suspicious of the information provided by regional banks were fleeing with their money into T-bills and money market funds.

Treasury yields plummeted with the 2-year Treasury falling more than 74 basis points to 3.85% amid bets of a less aggressive Federal Reserve. The yield on the benchmark 10-Year U.S. Treasury Note shed 26 basis points from 3.70% to 3.44%.

Tech stocks soared as bond yields plunged on hopes for a Fed pivot. The tech-heavy Nasdaq gained 4.41%, erasing most of the losses suffered last week (up 11.12% year-to-date). The benchmark S&P 500 was up 1.43% week-over-week. It is now up 2.01% for the year. The Dow Jones was treading water, down 0.15% for the week (down 3.88% YTD). The CBOE volatility index (VIX) hit its highest level since October above the 25 threshold. Another sign of market stress: the rally in the yellow metal gained further momentum. Gold futures recorded their third consecutive weekly rise (+6.59%) above $1,990/Oz, a level not seen since April.

Unlike their U.S. peers, European stock markets took a nosedive. The announcement Wednesday that Credit Suisse had received a financial lifeline - to borrow as much as CHF 50 billion - from the Swiss National Bank did not allay fears about the outlook of the troubled bank. Credit Suisse stocks lost 25.5% over the week, pressuring the European banking sector. Yet, to prevent further erosion of confidence in the Swiss banking system, UBS has agreed to acquire Credit Suisse, the Swiss government said on Sunday. The Swiss National Bank will lend up to CHF 100 billion to help UBS digest its rival. Soon after this news, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements. Furthermore, it is interesting to note that the Fed had already expanded its balance sheet by nearly $300 billion over last week to help out banks with new loans.

The European Central Bank had shrugged off market tensions and raised interest rates by a half percentage point, in line with its determination to ensure the timely return of inflation to the 2% medium-term target. The MSCI EMU slumped 4.06% (+6.05% YTD). In the UK, the FTSE dropped 5.33% bringing its year-to-date performance to -1.56%.

Japan’s Nikkei 225 index was hit the hardest in Asia, falling 2.88% (up 4.75% YTD). India’s Nifty 50 fell 1.80% (down 5.55% YTD) though data on Monday showed that CPI inflation eased in February from the prior month. The Shanghai Composite somewhat bucked the trend, up 0.63% for the week (up 5.22% YTD) despite heavy selling in local bank stocks.

Energy and bank stocks in the doldrums

Oil prices plummeted for a second straight week, suffering their biggest weekly loss since April 2020 (WTI crude down 12.96% at $66.74 a barrel). Energy was the worst performer among the S&P 500 sectors (-7.02%). Energy ministers from Saudi Arabia and Russia met in Riyadh on Thursday to discuss potential action to support the crude oil market. Their meeting had no impact on the WTI and Brent prices. The financial sector was the other detractor (-6.09%) within the S&P 500 index. Bank stocks continued to sink as investors remained worried about a run on deposits.

By contrast, communication services led the pack, up 6.94%, helped by Alphabet-Google (GOOG, up 12.58%) and Meta Platforms Inc (META, up 8.97%). The latter said on Tuesday it would lay off 10,000 employees this year, in a second round of job cuts, incurring charges of as much as $5 billion. Technology also outperformed the broad market in the wake of Microsoft stocks (MSFT, +12.41%), underpinned by falling Treasury yields amid ongoing bets that the Fed can deliver its final hike of the year next week, or even pause hikes as suggested by Goldman Sachs, and then cut rates in the second half of the year.