Wall Street Slips as Energy & Bank Stocks Weigh

U.S. stocks ended the first week of May lower as worries about the health of regional banks clouded over Powell’s speech. After the Federal Reserve raised interest rate by a quarter of a percentage point on Wednesday, he suggested the Federal Reserve could be nearing the end of the rate hiking cycle. Unfortunately, the banking upheaval offset optimism about a likely Fed pause in June. 

Investors continued to flee small and medium-sized banks while a lot of hedge funds were increasing their short positions against these targets. Despite a last-minute rebound on Friday, regional bank stocks suffered severe losses week-over-week. PacWest (PACW) plunged 43.25%, First Horizon National Corporation (FHN) dropped 37.66%, Western Alliance Bancorporation (WAL) lost 26.83%. The move came just days after JPMorgan (down 1.09% for the week) acquired First Republic Bank (in free fall with a loss of 90.16%) in a bid to head off further banking turmoil in the U.S. First Republic Bank is the second-largest bank failure in the country’s history and the third midsize bank to fail in only two months. 

Also weighing on the market, Treasury Secretary Janet Yellen said the U.S. government could run out of money within a month. President Joe Biden and congressional leaders must reach a compromise on the debt ceiling but there is no sign of an imminent resolution. The cost of insuring exposure to U.S. sovereign debt rose to the highest since 2009 with the 5-year Sovereign CDS above 64 (+53% month-to-date). The failure to prevent a default would have highly negative effects on the economy.

The Dow Jones Industrial Average fell 1.24% over the week. The S&P 500 was down 0.80% while the Nasdaq Composite struggled to stay above the flatline (up 0.07%).

Back in Europe, the ECB hiked interest rates by 25 basis points as expected on Thursday, slowing the pace of its policy tightening. The MSCI EMU shed 0.45%. The Stoxx Europe 600 Banks index performed in line with the broader market as there appears to be more confidence surrounding the European banking system despite the state-backed takeover of Credit Suisse by UBS Group. In the U.K., the FTSE 100 was down 1.17%, weighed by the energy sector.

In Asia, Japan’s Nikkei 225 index rose 1.04%, extending its winning streak to four weeks. China’s Shanghai Composite index added 0.34%. India’s Nifty 50 index and Korea’s Kospi Composite index treaded water, up 0.02% and down 0.02% respectively.

Oil price decline accelerates     

Energy stocks fell 5.81% over the week as WTI crude oil prices dropped 7.09% despite a bigger-than-expected fall in U.S. crude stockpiles. The second biggest drag within the S&P 500 index was the financials sector, down 2.65%, in the wake of the regional bank stocks’ downward spiral. After last week’s rebound, the communication services sector lost momentum (down 2.29%), as investors took profits in Meta platforms (META, down 3.14%), Netflix (NFLX, down 2.17%), and Alphabet-Google (GOOG, down 1.86%).

Only three of the top 11 S&P 500 sectors advanced, with information technology leading the pack (+0.60%), helped by positive results from Apple (APPL, up 2.29% for the week). The tech giant topped Wall Street estimates, underpinned by strong iPhone sales in emerging markets. Health care and utilities also managed to finish the week in positive territory (+0.09% and +0.05% respectively).