The week’s dizzying swings in financial markets continued on Thursday, as investors welcomed news that a group of big banks could be on the verge of backing First Republic Bank, which would help ease some of the turmoil stemming from smaller lenders to alleviate.
The S&P 500 rose 1.4 percent after recovering from an early decline, in a rally that gained momentum after reports that a group of banks are close to an agreement to support First Republic Bank could, a regional lender that got in the way of investors. Hair after the collapse of the Silicon Valley bank.
First Republic’s stock price swung from a deep loss to a 13 percent gain, a quick rebound but erasing only a small portion of the damage from a blue week. Even after Thursday’s rally, First Republic has lost 70 percent of its market value this month and removed about $20 billion from its valuation.
A number of other smaller banks, such as Western Alliance and PacWest, were also heartened by news of the possible intervention.
Despite Thursday’s broad rally, this week’s destabilizing volatility has set investors up for further stress in the financial system stemming from the significant move away from a decade of low interest rates. Goldman Sachs, for example, has raised its odds that the US economy could slip into recession over the next 12 months, “reflecting heightened near-term uncertainty about the economic impact of stress on small banks.”
Seema Shah, chief global strategist at Principal Asset Management, said the recent turmoil has served as a warning. “Until this week, markets had largely ignored the threats that policy tightening was beginning to uncover,” she said.
Thursday’s broader market rally also boosted shares in energy companies, which came under pressure after a rapid drop in oil prices on Wednesday. Oil prices, sensitive to the prospect of a global downturn weakening demand for the commodity, also rose modestly, but a barrel of West Texas Intermediate crude, America’s benchmark, remained near its lowest since late 2021.
Broader markets seemed more stable even before news of the rescue of the First Republic. Investors had largely shrugged off a 0.5 percentage point interest rate hike by the European Central Bank, taking comfort in a rebound in shares at Credit Suisse, the embattled European bank, after it announced it would tap a lifeline at the Swiss central bank and loans raise up to $54 billion.
The Stoxx 600 index, which tracks shares of Europe’s largest companies, closed 1.2 percent higher and shares of Credit Suisse rose almost 20 percent, recouping part of the previous day’s sharp loss that amid fears for the country financial health of the lender.
Central banks have hiked interest rates to curb inflation, but higher rates also mean higher costs for businesses, adding to the pain some banks have endured in recent days.
Policymakers must now balance the desire to further slow inflation against the risk of further instability in financial markets. Analysts noted that the ECB’s decision gained weight ahead of next week’s Federal Reserve meeting, with US Treasury yields rising as investors bet the Fed would follow the ECB in raising interest rates next week.
Still, traders in the futures markets continued to bet the Fed will cut rates later this year as inflation continues to fall and the economy continues to deteriorate, although the Fed and its Chair, Jerome H. Powell, have said so so far have no plans to do so.
“The balance of risk has undoubtedly shifted,” noted Daleep Singh, chief global economist at PGIM Fixed Income. “The risks of tightening too much are now at least as great and probably greater than the risks of tightening too little. We expect Fed Chair Powell next week to tie a definitive rate hike to the message that Fed policy will then take an extended pause, with the possibility of resuming rate hikes later — or initiating rate cuts — in the second half of the year.”
Jin Yu Young and Vivek Shankar contributed coverage.