To The Moon

Market Recap | Rally in Bank Shares Lifts U.S. Stocks

Increased investor optimism about the banking system helped lift U.S. stocks Tuesday, with shares of regional banks including First Republic Bank at the forefront of the rally.

Buoyed in part by reassuring comments by global financial authorities, both the S&P 500 and the Dow Jones Industrial Average posted their second straight day of gains for the first time since Silicon Valley Bank collapsed less than two weeks ago. Yields on U.S. government bonds also climbed sharply, as investors scaled back bets that an economic downturn could force the Federal Reserve to start cutting interest rates in the near future.

$S&P 500(.SPX)$  gained 1.3% in afternoon trading. $DJIA(.DJI)$  rose 0.9% and $NASDAQ(.IXIC)$ climbed 1.6%.

The indexes advanced ahead of Wednesday's interest-rate decision from the Fed. There is unusual amount of uncertainty among investors about what the Fed will do as it attempts to balance financial strains against stubbornly high inflation.

Aiding Tuesday's rally, Treasury Secretary Janet Yellen said the government could step in to protect depositors at other banks if regulators see a risk of a run. Meanwhile, European regulators made attempts Monday to calm bond investors after a risky type of bank debt, known as additional tier 1 bonds, sold off sharply. The selloff came after Credit Suisse's AT1 bonds were wiped out as part of the troubled Swiss bank's hastily arranged sale to rival UBS.

"The equity market is not pricing in a full banking crisis," said Seema Shah, chief global strategist at Principal Asset Management. "There's not panic setting into that investor space, which is certainly a very important thing."

Shares in big U.S. banks such as JPMorgan Chase posted strong gains, while some smaller lenders surged. $First Republic Bank(FRC)$  jumped about 29%, after shedding nearly half of its value Monday. $Western Alliance(WAL)$  andand $PacWest Bancorp(PACW.US)$, two other midsize banks that have come under pressure, each climbed more than 15%.

JPMorgan Chief Executive Jamie Dimon is leading discussions about new efforts to stabilize the troubled First Republic, The Wall Street Journal reported Monday. The bank has become a focus of investors worried that a flight of deposits from midsize banks triggered by the run on Silicon Valley Bank could lead to a pullback in lending and drag on economic growth.

In Europe, bank stocks and bonds also recovered, following choppy trading Monday sparked by UBS's emergency takeover of Credit Suisse. UBS's stock climbed 12%. Additional tier 1 bonds ticked higher, with a roughly $1 billion AT1 exchange-traded fund from Invesco gaining about 0.8%.

Some analysts have argued in recent days that the Fed on Wednesday might not raise rates to keep its focus on financial stability. Nevertheless, a growing consensus has emerged that the Fed will still raise rates by 0.25 percentage point.

Fed-funds futures show investors are now pricing in a roughly 83% chance that the central bank lifts interest rates by 0.25 percentage point for a second consecutive time, according to data from CME Group.

"I probably agree with consensus that they are likely going to hike 25 basis points tomorrow," said Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets. "I don't necessarily think it's the right option, but I just think...they really want to separate out the financial stability tool kit from the inflation fighting tool kit."

Along with its decision on interest rates, Fed officials could have a significant impact on markets by signaling what their plans are for the future.

Some analysts have warned that Fed officials may be less concerned than investors that rate increases pose a serious threat to financial stability. If that become apparent on Wednesday, stocks could decline, given how expectations for looser monetary policy have recently helped buoy riskier assets, these analysts say.

In a sign that investors were already recalibrating their interest-rate bets, prices of U.S. Treasurys posted major declines Tuesday, pushing their yields higher.

In recent trading, the yield on the two-year U.S. Treasury note was 4.175%, according to Tradeweb, up from 3.922% Monday.

The yield on the 10-year note also climbed, to 3.603% from 3.477% Monday. Yields on both bonds, however, remain well below their levels from two weeks ago, when investors thought that the Fed could raise rates by 0.5 percentage point this month.

Overseas, the Stoxx Europe 600 jumped 1.3%. Asian stocks also rose. Hong Kong's Hang Seng Index gained 1.4%, while in mainland China, the Shanghai Composite rose 0.6%.

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