Analysis-Banking woes, Fed keep investors on edge in nervous U.S. stock
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[March 25, 2023] By
NEW YORK (Reuters) - Investors are settling in for a long slog in the
U.S. stock market in coming months, braced for more tumult in the
banking sector and worries over how the Federal Reserve’s tightening
will ripple through the economy.
Banking sector concerns drove sharp moves in financial stocks in the
United States throughout the week after the collapse of two U.S. lenders
and last weekend’s Swiss-government-orchestrated takeover of troubled
Credit Suisse by rival UBS.
Many worry that other nasty surprises are lurking as the rapid series of
interest rate hikes the Fed has delivered over the past year dry up
cheap money and widen fissures in the economy.
"The market is very nervous at this point and investors are acting first
and looking into the nuances later," said Wei Li, global chief
investment strategist at fund giant BlackRock. "It's understandable
because it’s not super clear that this is definitely contained."
In recent days, investors have focused on German giant Deutsche Bank.
The company's shares have lost around more than a quarter of their value
this month, including Friday’s 8.5% fall, and the cost of protecting
against a default on its bonds soared, even though few put it in a class
with Credit Suisse.
"We are not concerned today about counterparty, liquidity issues" with
Deutsche, JPMorgan analysts said in a Friday report.
For now, few investors see this year's events as a repeat of the
systemic crisis that swept through markets in 2008, taking down Lehman
Brothers and prompting government bailouts of large financial
institutions. But investors are guarded, wary that another bank run
could erupt if people believe U.S. or European regulators won't protect
“It’s almost like the prisoner’s dilemma where if everyone agrees that
they won’t pull their deposits then everything should be okay, but if
just one person decides they are getting out then the snowball keeps
growing,” said Tim Murray, capital market strategist in the Multi-Asset
Division of T. Rowe Price, who is underweight equities, focusing on
money market accounts that offer yields comparable to Treasuries.
Uncertainty over the Fed's intentions is amplifying investors’
hesitation in stocks and sparking huge swings in U.S. government bond
[to top of second column]
Traders react as Federal Reserve Chair
Jerome Powell is seen delivering remarks on a screen, on the floor
of the New York Stock Exchange (NYSE) in New York City, U.S., March
22, 2023. REUTERS/Brendan McDermid
The Fed raised rates by 25 basis points on Wednesday but indicated
it was on the verge of pausing further increases. Investors piled
into the safe haven of U.S. Treasuries, sending yields on the
two-year note, which closely reflects Fed policy expectations, to
3.76% this week, the lowest since mid-September.
Further banking industry failures could mean sooner rate cuts as
weakened financial conditions allow the Fed to ease up on its fight
against inflation, said Tony Rodriguez, head of fixed income
strategy at Nuveen. Futures contracts suggest the Fed will start
cutting rates by year-end.
Falling interest rates would make dividend-paying stocks and some
riskier assets such as higher-quality below-investment-grade bonds
attractive, Rodriguez said. "It makes sense to take risk in those
areas to take advantage of the weakness we're seeing now."
Risk assets have been somewhat resilient despite the concerns in the
banking sector, said Jason England, global bonds portfolio manager
at Janus Henderson Investors. The S&P 500 is up 3.4% this year,
though far off its early February highs, and it rose 1% this week,
helped by a rally in tech shares.
"If inflation comes down because of disruptions in banks and you
create tightening for homeowners, the Fed suddenly has its work done
for it," he said.
England expects longer-duration bond yields to start to rise from
current levels, making short-term bonds and money market funds more
Investors will likely remain steeled for the potential for another
high-profile failure until the Fed or Treasury respond in a way that
calms fears of another bank run, said Katie Nixon, chief investment
officer, wealth management, at Northern Trust, who is focusing on
tech-sector stocks with "fortress balance sheets."
"Right now it's a crisis of confidence and everyone is looking for
direction," she said.
(Reporting by David Randall; Editing by Leslie Adler)
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