Stocks shook off an early stumble and gained ground Thursday amid hopes for help for a bank at the center of Wall Street’s hunt for what’s next to crack in the struggling industry.
The S&P 500 was 1.8 per cent higher in afternoon trading after erasing an earlier loss following reports that First Republic Bank could receive financial assistance or sell itself to another bank.
The Dow Jones Industrial Average was up 364 points, or 1.1 per cent, at 32,228, as of 1:14 p.m. Eastern time, while the Nasdaq composite was 2.2 per cent higher.
This week has been a whirlwind for markets globally on worries about banks that may be bending under the weight of the fastest set of hikes to interest rates in decades. The crisis of confidence has been flaring since Friday’s collapse of Silicon Valley Bank, which was the second largest bank failure in U.S. history.
Since then, Wall Street has tried to root out banks with similar traits, such as lots of depositors with more than the $250,000 limit that’s insured by the Federal Deposit Insurance Corp., or lots of tech startups and other highly connected people that can spread worries about a bank’s strength quickly.
First Republic Bank has been at the center of the market’s swivels, and it rose 6.7 per cent after slumping earlier.
But big banks including JPMorgan Chase and Morgan Stanley are discussing a potential deal that could mean a big infusion of cash for the bank, according to a report from The Wall Street Journal.
Financial stocks across the S&P 500 flipped from losses in the morning to gains by midday. Treasury yields also strengthened suddenly, a sign of increased confidence from the bond market.
Across the Atlantic, European stocks rose after the European Central Bank announced a hefty increase to interest rates. They were also stabilizing after dropping sharply Wednesday on worries about Credit Suisse. The Swiss bank has been battling troubles for years, but its plunge to a record low raised concerns just as more attention shines on the wider industry.
Credit Suisse’s stock in Switzerland leaped 19.2 per cent Thursday after it said it will strengthen its finances by borrowing up to 50 billion Swiss francs ($54 billion) from the Swiss National Bank.
Treasury Secretary Janet Yellen told the Senate Finance Committee on Thursday that the nation’s banking system “remains sound” and Americans “can feel confident” about their deposits.
Much of the damage for banks is seen as the result of the Federal Reserve’s fastest barrage of hikes to interest rates in decades. They’ve shocked the system following years of historically easy conditions in hopes of driving down painfully high inflation.
Higher rates can tame 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 latter factor was one of the issues hurting Silicon Valley Bank because high rates forced down the value of its bond investments.
Wall Street increasingly expects banks’ struggles to push the Federal Reserve to hike interest rates next week by only a quarter of a percentage point. That would be the same sized increase as last month’s, and it would be counter to expectations from earlier this month that it could hike by 0.50 points as it had been potentially signaling.
Some traders are also betting on the possibility the Fed could take a pause on rate hikes next week.
The European Central Bank on Thursday raised its key interest rate by half a percentage point, brushing aside speculation that it may reduce the size because of all the turmoil around banks.
Some of Wall Street’s wildest action this week has been in the bond market, as traders rush to guess where the Fed is heading.
The yield on the 10-year Treasury rose to 3.55% from 3.47% late Wednesday. It was above 4% earlier this month, and it helps set rates for mortgages and other important loans.
All the stress in the banking system is raising worries about a potential recession because of how important smaller and mid-sized banks are to making loans to businesses across the country. Oil prices have slid this week on such fears.
Economists at Goldman Sachs said all the near-term uncertainty surrounding small banks mean they see a 35% probability of a recession in the next 12 months. That’s up from their prior forecast of 25%.
Reports on the U.S. economy, meanwhile, continue to show mixed signals.
The job market looks remarkably solid, and a report said fewer workers applied for unemployment benefits last week than expected. .
But other pockets of the economy are continuing to show weakness. Manufacturing has struggled, for example, and a measure of activity in the mid-Atlantic region weakened by more than expected.
The housing market has also been struggling under the weight of higher mortgage rates, though homebuilders broke ground on more projects last month than expected. That could be a signal the industry is finding some stability.
AP Business Writers Joe McDonald and Matt Ott contributed.
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