Wall Street Powered Ahead as Interest Rate Risks Deepen for U.S. Banks

Barry Adams
14 Mar, 2023
New York City

Stocks rebounded, crude oil plunged and bond yields scaled higher after investors surmised that the risk of contagion following the collapse of Silicon Valley Bank has been contained.  

Investors also welcomed the easing of consumer inflation in February, matching the expectations set by some investors. 

Consumer price index rose at a slower pace in February after energy prices eased but core inflation accelerated following the surge in housing costs. 

The easing of overall inflation powered the market rally and benchmark indexes advanced between 1% and 2%. 

Regional banks also rebounded between 15% and 40% after three days of steep losses following the collapse of three banks in less than a week. 

But the surge in bank stocks waned in the afternoon, reflecting ongoing worries of wider interest rate risks to banks of all sizes. 

Despite today's rebound, the banking sector is not out of the woods and more significant declines may be ahead. 

Rising interest rates in the U.S. and the Euro Area are causing turmoil in the bond portfolio of banks and losses will expand with every basis point increase in interest rates.

"The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at year-end 2022.

Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry," noted FDIC Chairman Martin Gruenberg in his prepared remarks delivered on March 6 at industry conference.

Moreover, the disclosures from small and mid-sized banks looking to raise capital to fund Treasury securities portfolio losses will invite attention of short sellers and depress stock valuation fueling higher media coverage. 

Increasingly, the vicious cycle with negative feedback takes place on social media channels and manifests in a bank run, all happening at an accelerated pace. 

In 2008, Washington Mutual experienced deposit losses of $17 billion over two weeks before regulators shut down the bank as the largest U.S. bank failure, last week Silicon Valley Bank lost $42 billion of deposits in one day.  

 

Moody's Place Six Banks On Negative Watch List 

Moody's Corp lowered its view on the U.S. financial system and placed six mid-sized banks on a negative watch list. 

“Banks with substantial unrealized securities losses and with non-retail and uninsured US depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings and capital,” the rating agency Moody's noted in a report. 

Belatedly, Moody's removed all its rating on Signature Bank and placed six mid-sized banks on its watch list with a view to downgrade bank ratings. 

Comercia, INTRUST Financial, First Republic Bank, UMB Financial Corp, Western Alliance and Zions Bancorp are on Moody's negative watch list. 

Moody's, known for its central role in rating subprime loans as investment worthy, said higher rates for longer are likely to exacerbate competition for deposits but also increase losses in securities held-to-maturity. 

 

February CPI Slowed, Core Rate Accelerated 

The consumer price inflation eased to 6.0% in February from 6.4% in January, the U.S. Labor Department reported Tuesday.  The price increase was the smallest since September 2021. 

On a monthly basis, the overall index increase slowed to 0.4% in February from 0.5% in January. 

The shelter index was the largest contributor to the overall inflation accounting for 70% of total increase in the month. 

Core prices excluding food and energy accelerated to 0.5% in February from 0.4% in January and rose 5.5% on an annual basis. 

The energy index slowed to 5.2% in February from 8.7% in the previous month, the food index increase slowed to 9.5% from 10.1% but the shelter index jumped to 8.1% from 7.9%. 

 

Stock Indexes and Yields Rebounded 

The S&P 500 index increased 1.8% to 3,920.56 and the Nasdaq Composite index soared 2.2% to 11,428.15. 

The yield on 2-year Treasury notes increased 21 basis points to 4.24%, 10-year Treasury notes jumped 17 basis points to 3.68% and 30-year Treasury bonds jumped 13 basis points to 3.80%.  

 

Crude Oil Dropped to 15-month Low 

Crude oil prices fell 4.7% and dropped to the level last seen in December 2021 amid worries about the health of the U.S. financial system continued to hover the market. 

Crude oil dropped $3.52 to $71.27 a barrel and natural gas fell 2 cents to $2.57 a thermal unit. 

 

U.S. Stock Movers 

Regional banks rebounded a day after several regional banks fell between 30% and 60%. 

First Republic Bank jumped 54% to $48.01, Western Alliance Bancorp rebounded 38.9% to $36.05 and KeyCorp advanced 11.5% to $11.25. 

Stocks of order delivery firms and ride-sharing companies jumped after a California appeals court permitted companies to classify their drivers as independent contractors and not employees. 

Uber Technologies Inc gained 6% to $32.72, Lyft Inc increased 5.6% to $8.90 and DoorDash Inc advanced 6.8% to $57.47. 

Credit Suisse AG declined 2% to $2.22 after the Swiss bank said it has discovered "material weakness" in its financial reporting processes. 

United Airlines Holdings Inc decreased 4.7% to $46.52 after the airline forecasted first quarter loss citing higher fuel costs and weaker demand growth. 

The international airline estimated adjusted loss in the range of 60 cents and $1.0 compared to its previous estimate of a profit between 50 cents and $1.0.

Cvent Holding Corp jumped 12.3% to $8.30 after the event technology firm agreed to be acquired by Blackstone controlled private equity funds for $8.50 a share or $4.6 billion of enterprise value.   

GitLab Inc plunged 32.6% to $30.71 after the cloud computing software company estimated sharply lower revenue in 2024. 

The software services provider estimated revenue to fall between $529 million and $533 million in 2024. 

Revenue in the fourth quarter increased 58% to $122.9 million from $77.8 million and loss attributable to shareholders fell to $38.7 million from $45.8 million and diluted loss per share shrank to 26 cents to 32 cents a year ago. 

 

European Markets Brace for Higher Interest Rates and Risks to Banks 

European markets rebounded on Tuesday following the worst one-day loss in the previous session in 2023 on concerns of wider fallout from the collapse of Signature Bank and Silicon Valley Bank in the U.S.  

Stock indexes jumped as much as 2% and bond yields edged lower after nervous investors looked for more information on the health of the U.S. banking system. 

The swift actions from U.S. regulators and governments bailed out uninsured depositors and calmed nervous markets for now, but worries of more bank failures remained. 

 

Indexes & Yields 

The DAX index increased 1.8% to 15,232.83, the CAC-40 index rose 1.9% to 7,141.57 and the FTSE 100 index jumped 1.2% to 7,637.11.

The yield on 10-year German Bunds inched higher to 2.42%, French bonds edged up to 2.95%, the UK gilts to 3.48% and Italian bonds to 4.27%. 

The euro edged up to $1.074, the British pound advanced to $1.217 and the Swiss franc to 91.29 cents. 

Brent crude oil fell $2.20 to $78.58 a barrel and the Dutch TTF natural gas fell 9% to Є45.09 per MWh. 

 

Europe Stock Movers 

Energy explorers and refiners were among the decliners after Brent crude and natural gas prices extended losses to the fifth session in a row. 

BP Plc declined 0.5% but Shell, TotalEnergies and Repsol gained between 1% and 1.5%. 

Resource stocks were on the defensive following the decline in copper and iron ore prices by 1%. 

Glencore, Antofagasta and Anglo American fell between 1% and 3%. 

Volkswagen AG decreased 1.6% to €128.40 and the German automobile maker said it plans to invest €180 billion between 2023 and 2027 in "in the most attractive profit pools and regions, with more than two-thirds allotted for electrification and digitalization."

Total vehicle sales declined 7% to 8.3 million worldwide in 2022. 

Group revenue in the full-year 2022 increased 12% to €279 billion and earnings after-tax increased 2.6% to €15.8 billion. 

The automotive group reported an annual dividend of €8.70 per common share, an increase from €7.50 a year ago.  

Credit Suisse AG declined as much as 4.5% before closing down 0.8% to Sfr 2.24 after the troubled Swiss-lender admitted "material weaknesses" in its financial reporting processes. 

Casino Guichard Perrachon SA increased 7.3% to €8.35 after the French discount grocery chain said it plans to sell additional stake in the Brazil-based cash and carry chain Assai. 

The company plans to sell its 13% stake or 174 million shares through a secondary public offering and raise between €550 million and €600 million. 

Assicurazioni Generali SpA advanced 2.4% to €18.34 after the Italian insurance company reported record operating profit in 2022.