The failure of First Republic Bank over the weekend barely dented financial markets on Monday, as investors shrugged off the latest bank seizure to focus instead on corporate profits and the Federal Reserve’s next big decision on interest rates this week.
The S&P 500 barely budged on Monday, after the Federal Deposit Insurance Corporation’s early morning decision to take the ailing regional lender First Republic under its control and immediately sell it to JPMorgan Chase at a subsidized price. The index rose as much as 0.4 percent through the day, before closing just slightly lower than where it started the day.
After dropping 75 percent last week, First Republic’s stock price continued to slump overnight Sunday until trading was eventually halted early Monday morning at around $2 per share. The stock traded at more than $120 at the start of the year.
However, investors dismissed any concerns around contagion from First Republic’s woes. The muted rally on Monday morning initially added to gains for the S&P 500 last week, when concern over the fate of First Republic reignited.
The KBW bank index, which tracks shares of both regional lenders and big banks in the United States, fell 1.8 percent, weighed down by shares of Citizens Financial Group, down almost 7 percent, and PNC, which fell 6.3 percent. (PNC is the so-called super regional bank that had been in the final race to acquire First Republic.) JPMorgan’s stock rose about 2.1 percent.
Some smaller regionals suffered more punishing moves, though these were broadly isolated. New Jersey-based Valley National Bank fell almost 20 percent on Monday, while PacWest, which is headquartered in Los Angeles, fell over 10 percent.
The contained fallout from First Republic is indicative of the challenge facing investors as they balance the implications of one of the largest bank failures in history against better-than-expected corporate profits. Adding to the uncertainty is stubbornly high inflation and the aggressive measures taken by the Fed to contain it.
The central bank is focused on reducing inflation by raising interest rates and slowing the economy, even if it risks pushing the country into a downturn. The pressure on the nation’s banks could accelerate that downturn as they fall under increased scrutiny and tighten their lending standards, constraining the availability of credit in the economy.
“It removes uncertainty from one bank that has been in the headlines for a long time, but what does it really do for the forward outlook for banking in the U.S. or credit availability in the U.S.?” said George Goncalves, head of macro strategy at MUFG. “It doesn’t make it better.”
Despite the tremors emanating from the banking sector, investors still expect the Fed to raise interest rates again on Wednesday, when it will conclude its latest policy meeting. The deal to salvage First Republic on Monday, alongside solid manufacturing data, helped solidify expectations of a 0.25 percentage point rate increase this week.
Yields on Treasury bonds, which set the cost of borrowing for the U.S. government, also rose sharply on Monday, signaling some relief, analysts said, that the risks concerning First Republic were now under control.
The yield on the 10-year Treasury bond ratcheted 0.16 percentage points higher on Monday to 3.58 percent, its biggest jump since September, while the yield on the two-year Treasury bond, which is sensitive to changes in interest rate expectations, rose 0.14 percentage points to 4.15 percent.
First Republic had been at “the top of the list of regional banking concerns,” analysts at BMO Capital Markets wrote in a note on Monday morning. “The resolution appears to be a net positive for investors’ concerns regarding the stability of the overall banking system.”
Source: New York Times
