Banks Falter After Early PACW “Squeeze”

Stocks slipped this morning as banking shares attempted to rally. The Dow, S&P, and Nasdaq Composite all endured small losses despite a major regional bank resurgence at the open.

Small banks got monkey-hammered lower last week before a Friday rally on strong Apple (NASDAQ: AAPL) earnings and an April jobs report “beat.” And though April’s payroll data seemed hawkish, a massive downward revision to the February and March job numbers offset any damage April could have done.

Today, banks picked up where they left off, but this time it was seemingly beleaguered California bank PacWest (NASDAQ: PACW) that led the charge early into the session. The bank said last Wednesday that it needed cash and was considering a sale among other options, including a capital rise. This spiked bank stocks lower following a bearish close in response to Fed Chairman Jerome Powell’s post-rate hike press conference.

PACW crashed over 50% last Thursday then popped 82% higher the following session. This morning, PacWest CEO Paul Taylor announced a dividend cut in order to solve the bank’s cashflow issues while adding that the bank remains “fundamentally sound.”

“Given current economic uncertainty, recent volatility in the banking sector and potential changes in regulatory capital requirements, we view reducing the dividend as a prudent step to accelerate our plans to build capital,” Taylor said.

PACW jumped another 30% higher today before giving up almost all of its gains through noon. The stock currently sits on a meager 2.4% gain by comparison. Most other banks faded as well while some dipped into the red.

“It looks like Wall Street will try to find out if bank stress is nearing the end,” said Oanda analyst Edward Moya.

“This week won’t be as busy as last but it will still be important.”

Investors are likely to be more imminently focused on inflation with the April Consumer Price Index (CPI) due out Wednesday morning. The debt ceiling debate could steal headlines, too, after Treasury Secretary Janet Yellen warned government officials that the US could default as early as June 1st.

“Waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States,” wrote Yellen in a note.

In other words, very bad things will happen if the government doesn’t raise the debt ceiling. This happens every time the US approaches the debt ceiling, and without fail, the debt ceiling has been lifted on each occasion as the market collectively shrugs.

Word to the wise: don’t expect this go around to be any different, even if the media attempts to stir up fear and confusion as the debt ceiling draws closer in the weeks ahead.


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