Stock rallies as the First Republic receives a bailout

The week’s dizzying swings in financial markets continued on Thursday, as investors welcomed a group of big banks stepping in to support their smaller counterpart First Republic Bank, helping to ease some of the turbulence emanating from regional lenders.

The S&P 500 rose 1.8%, after recovering from an early tumble, in a rally that accelerated after news that a group of 11 banks would deposit a total of $30 billion with of First Republic, which entered the crosshairs of investors after the failure of Bank of Silicon Valley.

First Republic’s stock price went from a deep loss to a double-digit gain, a quick rally but one that erased only a small chunk of the damage from a bruising week. Even after Thursday’s rally, First Republic has lost more than 70% of its market value this month, wiping around $16 billion off its valuation.

A host of other smaller banks, such as Western Alliance and PacWest, were also aroused by news of the intervention.

Despite Thursday’s broad rally, this week’s destabilizing volatility prepared investors for further stress in the financial system, stemming from the substantial abandonment of a decade of low interest rates. Goldman Sachs, for example, raised its odds of the US economy slipping into recession over the next 12 months, “reflecting heightened near-term uncertainty around the economic effects of small bank stress.”

Seema Shah, chief global strategist at Principal Asset Management, said the recent crisis served as a wake-up call. “Until this week, markets had largely ignored the threats that policy tightening was beginning to uncover,” she said.

Thursday’s broader market rally also lifted shares of energy companies, which had come under pressure following a rapid drop in the price of oil on Wednesday. Oil prices, sensitive to the prospect of a global slowdown sapping demand for the commodity, also rose slightly, but the barrel of West Texas Intermediate crude, the American benchmark, remained close to its lowest level since the end of 2021.

Broader markets seemed more stable even before the announcement of the bailout of the First Republic. The S&P 500 remains up for the year and is on course to close its second-best week of 2023, barring another reversal on Friday.

Investors had largely ignored a 0.5 percentage point rate hike from the European Central Bank, taking comfort in the rebound in the share price of Credit Suisse, the troubled European bank, after it said it would exploit a lifeline of the Swiss central bank and would borrow up to $54 billion.

The Stoxx 600 index, which tracks the shares of Europe’s biggest companies, ended up 1.2% and shares of Credit Suisse jumped nearly 20%, recouping some of the steep loss in the watch that had fueled fear about the financial health of the lender.

Central banks have raised interest rates to try to contain inflation, but higher rates also mean higher costs for businesses, which has contributed to the pain felt by some banks in recent days.

Policymakers must now strike a balance between the desire to keep inflation down and the risk that it could add to financial market instability. Analysts noted that the ECB’s decision took on added significance ahead of next week’s Federal Reserve meeting and that US government bond yields rose as investors leaned into bets that the Fed would follow. the ECB by raising its benchmark rate next week.

Yet futures traders continued to bet that the Fed would cut interest rates later this year as inflation continues to decline and the economy continues to deteriorate, even as the central bank and its president, Jerome H. Powell, have so far stated that there are 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 over-tightening are now at least equal, and probably greater, than the risks of doing too little. We expect Fed Chairman Powell to associate a final rate hike next week to a 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 report.