March 26, 2023

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Stocks fell as First Republic weighed on banks

Stocks were losing ground early in Friday’s trading session as banks found themselves under pressure the day after 11 major US banks came together to deposit $30 billion in First Republic (FRC) in a bid to stabilize the banking system.

Close to 10:50 a.m., ET stock was trading near session lows, with the S&P 500 (^GSPC) down 1.2% and the Dow Jones Industrial Average (^DJI) down 1.4%. The technology-heavy Nasdaq Composite (^IXIC) fell 1% after taking some time in the green numbers earlier in the trading session.

After a negative opening, investors reacted positively to the biggest economic data point of the day, the preliminary reading of consumer sentiment from the University of Michigan, which showed inflation expectations fell to their lowest level since April 2021.

The report also noted that the survey was 85% complete at the time of the Silicon Valley bank failure, which means initial reactions to the event from consumers won’t emerge until later this month. Tech stocks initially moved higher after the news, as lowered inflation expectations likely point to softer Fed rate increases, which is good for tech stocks.

Shortly after that move higher, tech stocks followed the S&P 500 and Dow indexes into red numbers.

Stocks rose sharply on Thursday after news broke throughout the day that major banks led by JPMorgan (JPM) and Bank of America (BAC) are set to inject capital into the First Republic in what amounts to an industry bailout of the troubled bank.

The two companies eventually announced their agreement to support First Republic half an hour before the market closed.

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Speaking with Yahoo Finance Live on Thursday, longtime banking analyst Dick Boff said after the moves, the near-term banking crisis is “over.”

Shares of the First Republic, which was halted by volatility multiple times on Thursday, fell about 20 percent early Friday along with the broader banking sector.

First Republic Bank’s headquarters is seen on March 16, 2023 in San Francisco, California, United States. (Photo by Tayfun Coskun/Anadolu Agency via Getty Images)

Investors have also been tracking crude oil prices, with WTI down nearly 3% to trade near $66.40 a barrel, the lowest in nearly 15 months as oil prices have come under severe pressure in the past week.

The treasury market will also remain in focus, with the 10-year yield holding steady near 3.48% early Friday, just over a week after rising 4%.

In a note to clients Thursday, analysts at Bespoke Investment Group highlighted how some of the recent volatility in the treasury market — particularly with short-term Treasurys which tend to be more sensitive to the Fed’s outlook — likely came from “forced “is, non-discretionary) buying and selling, and prices agreed upon by price-insensitive buyers or sellers do not necessarily include all available information.”

“Another example is the massive influx of cash into money market funds this week reported by ICI: total fund assets rose 2.5% or $121 billion, and money funds are forced to put that money to work adding pressure to buy short-term interest rates,” she wrote. The company’s “collapsing bills’ yields and very high volatility are consistent with the notion that cash flows are forcing buying into certain markets.”

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In a note to clients on Friday, Thomas Matthews, chief market economist at Capital Economics, reiterated that view, noting that the front end of the Treasury curve now points to the Fed’s benchmark interest rate ending in 2023 about 2 percentage points lower than investors expected. Since a week.

“There is a good chance, in our view, that investors are now underestimating how much central bankers will raise interest rates over the next two months,” Matthews wrote. “As such, we believe that the rally in short-term bonds could head in the opposite direction.”

The Fed will announce its next policy decision on Wednesday, March 22, with investors pricing in the nearly 80% chance that the central bank will raise rates by another 0.25%, According to data from the CME Group.

Friday also marks a Quadruple Magic in the US markets, as contracts for single stock options and futures contracts, as well as index options and futures contracts, expire at the close of the day.

There will also be a reshuffle in some sectors of the S&P 500, with S&P reclassifying 14 stocks in the index to new sectors as of today’s close.

The most popular names on the go include Target (TGT), Dollar General (DG), and Dollar Tree (DLTR), which will move from the Consumer Discretionary (XLY) segment to Consumer Staples (XLP). Other notable companies moving include sectors such as Visa (V), Mastercard (MA), and PayPal (PYPL), which will move from technology (XLK) to financial (XLF).

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