Stocks Sour On Regional Banks, Real Estate and Recession Worries

Barry Adams
02 May, 2023
New York City

Trinity of ongoing worries about regional banks, looming U.S. government shutdown and rate path uncertainties drove market indexes lower. 

Regional banking crisis remained front and center despite some investors estimating the end of the crisis after JP Morgan Chase acquired First Republic Bank. 

But many investors worried that higher rates will only force banks to curtail lending and drive commercial real estate into its own crisis. 

Western Alliance Bancorp dropped as much as 20%, Zions Bancorp declined 25% and PacWest Bancorp plunged 30% after investors shifted focus from First Republic to these three banks. 

Rising rates are going to add more stress on balance sheets of several large and small banks, and investors are not sure how many banks have balance sheets and depositor profiles similar to failed Silicon Valley Bank and First Republic Bank. 

The U.S. Federal Reserve is scheduled to announce its rate decision at the end of a 2-day policy meeting on Wednesday. 

Financial markets are anticipating another 25 basis-point rate hike despite cooling of the headline inflation but core inflation has remained well anchored near 5%. 

But where rates go after Wednesday's hike, has set off an intense debate on Wall Street with some investors hoping the Fed to pause for several months but few looking for the central bank to begin to lower rates near the year's end. 

Moreover, multiple rate hikes have failed to cool tight labor market conditions and lowered inflation rate to the Fed's preferred level of 2% and significantly slowed economic growth. 

In fact, real rates are still negative and the Fed has a long way to go in cooling inflation and easing tight labor markets. 

The number of U.S. job openings declined by 384,000 to 9.6 million in March, the U.S. Bureau of Labor Statistics reported Tuesday. 

The job openings fell to the lowest level since April 2021, indicating that tight labor market conditions may be loosening but not much. 

Treasury Secretary Janet Yellen said that the federal government may run out of money as early as next month, stoking fears of government shutdown and disrupting normal businesses. 

Lawmakers have still not agreed on government spending levels and lifted the debt ceiling level to continue the working of the federal government. 

The European Central Bank is set to increase its key lending rate for the seventh time in a row on Thursday and investors are divided between 25 basis-point and 50 basis-point increase.

The Reserve Bank of Australia unexpectedly hiked its cash rate by 25 basis-point to 3.85%, lifting its reference rate to the highest level since April 20212. 

Rates are still negative with inflation at 7.0%, and the central bank signaled more rate increases ahead. 

Crude oil plunged more than 4.5% to a three-month low on the worries that rising rates in the U.S. and Europe may dampen economic activities and China's post-Covid demand rebound has lagged market expectations. 

 

U.S. Indexes & Yields 

The S&P 500 index fell 1.4% to 4,111.0 and the Nasdaq Composite decreased 1.1% to 12,075.60. 

The yield on 2-year Treasury notes inched slightly higher to 4.15%, 10-year Treasury notes edged down to 3.54% and 30-year Treasury bonds held at 3.80%. 

Crude oil fell $4.08 to $71.55 a barrel and natural gas prices fell 8 cents to $2.231 a thermal unit. 

 

U.S. Stock Movers 

Uber Technologies Inc increased 5.6% to $34.70 after the ride-hailing company reported better-than-expected quarterly results.  

Revenue in the quarter increased 29% to $8.82 billion and net loss in the quarter shrank to $157 million from $5.9 billion and diluted loss per share fell to 8 cents from $3.03 a year ago.  

Monthly active users in the quarter increased 13% from a year ago to 130 million and completed transactions soared 24% to 2.12 billion. 

The company guided gross booking between $33 billion and $34 billion and adjusted operating earnings between $800 million and $850 million. 

Pfizer Inc increased 1.1% to $39.61 after the company reported a sharp decline in revenue following the end of Covid-19 revenue. 

Revenue in the first quarter decreased 29% to $18.2 billion from $25.6 billion and net income plunged 30% to $5.5 billion from $7.86 billion and diluted earnings per share fell to 97 cents from $1.37 a year ago. 

The company reiterated its full-year 2023 outlook and forecasted revenue to fall between 29% and 33% or between $67.0 billion and $71.0 billion. 

Excluding Covid-19 products, the company forecasted operating revenue to increase between 7% and 9%. 

DuPont de Nemours Inc dropped 8% to $63.55 after the company forecasted weaker-than-expected revenue and earnings outlook in the current quarter on the slower than expected recovery in the electronics market. 

BP Plc declined 4.8% to 508.70 pence after the energy company reported a decline in profit driven by lower crude oil and natural gas prices.

The company declared an ordinary share dividend of 61.6 cents per share and announced to purchase $1.75 billion of its shares prior to the release of its second quarter results around the first week in July.

The company also slowed its pace of stock repurchase to $4.0 billion, at the lower end of its $14 billion to $18 billion in capital expenditure in 2023, based on the $60 a barrel Brent crude price forecast.

Net profit attributable to shareholders declined to $8.2 billion from $10.2 billion in the fourth quarter of 2022 but ahead of $20.4 billion in losses a year ago.  

Chegg Inc plunged 46% to $9.47 after the company reported a decline in revenue and the company said AI tools are negatively impacting new subscribers growth. 

Revenue in the first quarter declined 7% to $187.6 million and net income plunged to $2.2 million from $5.7 million and diluted earnings per share fell to 2 cents from 4 cents a year ago. 

"In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups. However, since March we saw a significant spike in student interest in ChatGPT. 

We now believe it’s having an impact on our new customer growth rate," said Dan Rosensweig, chief executive officer and president. 

 

European Markets Dropped 1%, Crude Oil Plunged 4.5% 

European markets traded lower amid growing anxieties of rate decisions from central bankers and looming worries of economic slowdown. 

Benchmark indexes declined after investors returned from a three-day weekend and reacted to another U.S. bank failure and worries how future aggressive rate hikes in the region will impact commercial real estate. 

The European Central Bank is set to increase its key lending rate on Thursday and investors are divided over the 25 basis points or 50 basis points increase.  

The U.S. Federal Reserve Bank is set to increase its policy rate by 25 basis points after a two-day meeting on Wednesday as policymakers grapple with the fallout from the failure of a fourth bank in the last two months. 

Despite the multiple rate hikes and a sharp fall in energy prices over the last year, inflation is well anchored in the economy and real rates remain negative. 

 

Eurozone Inflation Accelerated In April 

The Euro Area inflation increased to 7.0% in April from a 13-month low of 6.9% in March, Eurostat reported Tuesday. 

Core inflation, which exclude food and energy prices, slightly eased to 5.6% from record high 5.7% in March. 

Energy prices rebounded to 2.5% in April from a decline of 0.9% in March and services inflation accelerated to 5.2% from 5.1% respectively. 

However, food, alcohol and tobacco inflation slowed to 13.6% in April from 15.5% in March and non-energy industrial goods inflation slowed to 6.2% from 6.6% respectively. 

On a monthly basis, consumer prices rose 0.7% in April, slower than 0.9% in March. 

 

Europe Indexes & Yields 

The DAX index decreased 1.2% to 15,726.94, the CAC-40 index declined 1.5% to 7,383.20 and the FTSE 100 index fell 1.2% to 7,773.03. 

In the previous week, the DAX index increased 0.4%, the CAC-40 index dropped 1.8% and the FTSE 100 index declined 0.6%. 

The yield on 10-year German Bunds eased to 2.26%, French bonds to 2.85%, the UK gilts to 3.66% and Italian bonds to 4.17%.

The euro hovered near a one-year high against the dollar as the U.S. economy faced banking turmoil. 

The euro edged higher to $1.109, the British pound to $1.245 and the Swiss franc to 89.31 cents.

Brent crude fell $3.83 to $75.45 a barrel and the Dutch TTF natural gas decreased €1.31 to €37.53 per MWh.

 

Europe Stock Movers 

BP Plc declined 4.8% to 508.70 pence after the energy company reported a decline in profit driven by lower crude oil and natural gas prices. 

The company also slowed its pace of stock repurchase. 

HSBC Holdings plc increased 5.3% to 604.40 pence after the UK and China based lender tripled its quarterly profit. 

Ashtead Group plc increased 3% to 4,713.0 pence after the subsea equipment rental company announced a stock repurchase plan.  

Restaurant Group Plc jumped 17.1% to 47.40 pence after the company said business between January and April of 2023 "continued to be very encouraging." 

Comparable sales in the first quarter ending on April 2 soared 37% at concessions or stores located at airports, increased at Pubs and 2% at Wagamama. 

In the first four months to April, comparable sales increased 31% at Concessions, 4% at Wagamama and increased 6% at Pubs. However, comparable sales declined 3% at restaurants included in leisure. 

Ferrexpo Plc increased 1.8% to 110.0 pence after the company said chief executive Jim Norton will step down after nine years leading the iron ore pellet maker.