The week’s dizzying swings in financial markets continued on Thursday, as investors welcomed word that a group of big banks may be close to stepping in to support First Republic Bank, helping ease some of the turmoil emanating from smaller lenders.
The S&P 500 rose 1.4 percent, after recovering from an early drop, in a rally that gained steam after reports that a group of banks may be close to a deal to support First Republic Bank, a regional lender that has come into investors’ cross-hairs after the failure of Silicon Valley Bank.
First Republic’s stock price swung from a deep loss to a gain of 13 percent, a swift recovery but one that erased only a small amount of the damage from a bruising week. Even after the rally on Thursday, First Republic has lost 70 percent of its market value this month, wiping roughly $20 billion from its valuation.
A slew of other small banks, like Western Alliance and PacWest, were also lifted by news of the potential intervention.
Despite the broad rally on Thursday, the destabilizing volatility this week has investors braced for further stress in the financial system, stemming from the substantial shift away from a decade of low interest rates. Goldman Sachs, for example, has raised its odds that the U.S. economy could slip into recession over the next 12 months, “reflecting increased near-term uncertainty around the economic effects of small bank stress.”
Seema Shah, chief global strategist at Principal Asset Management, said the recent bout of turmoil had served as a warning. “Until this week, markets had broadly ignored the threats that tightening policy was starting to uncover,” she said.
The broader recovery in the market on Thursday also lifted shares of energy companies, which had come under pressure following a swift slide in the price of oil on Wednesday. Oil prices, which are sensitive to the prospect of a global downturn sapping demand for the commodity, also rose slightly, but a barrel of West Texas Intermediate crude, the American benchmark, remained close to its lowest level since the end of 2021.
Broader markets had appeared more settled even before news of the First Republic rescue. Investors had largely shrugged off a 0.5 percentage point rate increase from the European Central Bank, taking solace from a rebound in the share price of Credit Suisse, the embattled European bank, after it said it would tap a lifeline from the Swiss central bank and borrow up to $54 billion.
The Stoxx 600 index, which tracks shares of the biggest companies in Europe, finished 1.2 percent higher, and shares of Credit Suisse jumped almost 20 percent, recovering some of the steep loss from the day before that stoked fear about the lender’s financial health.
Central banks have been raising interest rates to try to rein in inflation, but higher rates also mean higher costs for companies, contributing to the pain experienced by some banks in recent days.
Policymakers must now balance the desire to continue slowing inflation with the potential for it to risk further instability in financial markets. Analysts noted that the E.C.B.’s decision took on heightened importance ahead of the Federal Reserve’s meeting next week, and yields on U.S. government bonds rose, as investors bet that the Fed would follow the E.C.B. in raising its benchmark rate next week.
Still, traders in futures markets continued to bet that the Fed will cut interest rates later this year as inflation continues to fall and the economy continues to deteriorate, even though the central bank and its chair, Jerome H. Powell, have so far said that there are no plans to do so.
“The balance of risks has undoubtedly shifted,” noted Daleep Singh, chief global economist at PGIM Fixed Income. “The risks from too much tightening are now at least equal to, and likely larger than, the risks of doing too little. We expect Fed Chair Powell to pair a final rate hike next week with a message that Fed policy will then go on an extended pause, with the possibility of resuming rate hikes later — or initiating rate cuts — in the second half of the year.”
Jin Yu Young and Vivek Shankar contributed reporting.