Stocks popped higher today as the bank rescues continued. The Dow, S&P, and Nasdaq Composite all surged, adding to the market’s recent volatility. Today’s rebound was courtesy of First Republic Bank (NYSE: FRC), which is in talks with JPMorgan (NYSE: JPM) and Morgan Stanley (NYSE: MS) about a major capital infusion.
In other words, JPM and MS are likely going to save FRC. The deal would need the “go-ahead” from regulators, but what’s not to love from the government’s point of view? It’s a bailout without government funds.
Plus, the big banks get more control over the smaller ones. It’s a win-win situation for everyone involved.
FRC shares exploded higher, tripping market circuit breakers several times. Trading was halted while the S&P leaped off its session lows.
It completely undid any damage caused by the European Central Bank (ECB), which raised rates by 50 basis points this morning, lifting Europe’s short-term lending rate from 3.0% to 3.5%. The market expected a 50 bp hike but was hoping for something weaker due to Credit Suisse’s (NYSE: CS) recent difficulties.
Instead, ECB chair Christine Lagarde unveiled the as-expected hike prior to news that Saudi National Bank – Credit Suisse’s major funder – would continue to provide the bank with funding after the Swiss National Bank expressed that it would support Credit Suisse should a crisis arise.
In other words, big banks and central banks scrambled to save distressed banks over the last 24 hours. That’s good for markets in the short-term. But will those gains hold once the bigger economic picture comes back into focus?
“Over the last week, the developments in the banking sector certainly is adding another layer of skittishness around investor confidence,” said AXS Investments CEO Greg Bassuk.
“But ultimately, investors are tying that back to: What does it mean for Fed policy and interest rates?”
There’s also the idea that the banking turmoil advanced the recession timeline significantly. Credit is expected to fall substantially in the coming months as banks transition from investing in Treasurys to parking their cash overnight with the Fed, which offers a smaller (but less risky) return. Banks dumping Treasurys would push yield higher, which should decrease lending.
Lending requirements could increase substantially, too, as regional banks attempt to counteract commercial real estate (ie, office space) loans going bust due to the “work from home” revolution.
For now, though, the more imminent threat – a full blown banking meltdown – seems to have been avoided. But sentiment could easily sour when (or if) the Fed raises rates at its next meeting on March 22nd. Restored banking stability will make the bolster the Fed’s case that it needs to hike.
Which could plunge stocks lower once again as it becomes clear that a recession, stubbornly high inflation, and higher rates are on their way.