ASX set to open higher after big bank deal boosts Wall Street

S&P said it could lower the rating even further despite a group of the biggest US banks announcing last week they would deposit $US30 billion in a sign of faith in First Republic and the larger banking industry.

While that money certainly helps, “it may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing,” the credit-ratings agency said.

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Stocks of other smaller- and mid-sized banks, meanwhile, were much stronger. New York Community Bancorp jumped 35.1 per cent after it agreed to buy much of Signature Bank in a $US2.7 billion deal, the Federal Deposit Insurance Corp. said late Sunday. Signature Bank became the industry’s third-largest failure earlier this month after regulators seized it.

Fifth Third Bancorp rose 6.4 per cent, and US Bancorp gained 6 per cent for two of the biggest gains in the S&P 500.

All eyes on the Fed

Much of the rest of the US stock market was also pushing higher, but how long that lasts is a question mark. A huge decision is looming on the calendar by the Federal Reserve.

The US central bank will announce its latest move on interest rates on Wednesday [early Thursday AEDT]. For a while, Wall Street was betting it would reaccelerate its hikes because of how stubborn high inflation has remained.

Higher rates can undercut inflation by slowing the economy, but they raise the risk of a recession later on. They also hurt prices for stocks, bonds and other investments. That was one of the factors hurting Silicon Valley Bank, which earlier this month became the second-biggest US bank failure in history. Bonds owned by it and other banks have seen their prices fall as interest rates rose sharply.

The Fed has already pulled its key overnight rate to a range of 4.50 per cent to 4.75 per cent, up from virtually zero at the start of last year.

But all the recent stress in the banking system has pushed Wall Street to believe the Fed likely won’t pick up the pace again on its rate hikes. Instead, the bet is that it will likely stick with an increase of 0.25 percentage points, according to data from CME Group.

Some bets are even calling for the Fed to hold steady on interest rates on Wednesday. But such a move could end up being more destabilising because it could raise uncertainty: “The market may question ‘what does Fed know that we don’t?’“, strategists wrote in a BofA Global Research report.

Historic bond swings

Many economists and investors were already expecting at least a mild recession to hit the US economy given all the recent rate increases. The worry is that strains for regional banks could raise the risk even higher. That’s because of how important such banks are in giving loans to smaller- and mid-sized companies to grow and hire more workers.

Drastic recalibrations by investors for what the Fed will do with interest rates have caused historic swings in the bond market. Yields there have plunged since earlier this month.

Consider the two-year US Treasury, which tends to move particularly closely with expectations for the Fed. Its yield was sitting above 5 per cent earlier this month, at its highest level since 2007, after data on inflation and other measures of the economy kept coming in higher than expected.

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Last week it plunged well below 4 per cent, which is a massive move for the bond market. It rose to 3.98 per cent from 3.84 per cent late on Friday.

Speculation is rising again on Wall Street that the Fed may begin cutting rates later this year. Not long ago, such hopes washed out of the market following a string of reports on the economy that were stronger than expected.

Cuts to rates can give the economy and banking industry more room to breathe, not to mention act like steroids for stocks and other investments. But they also give inflation more oxygen.

In markets abroad, stocks were higher in Europe after falling across much of Asia.

AP

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