Stocks Bounce as Investors Welcome Bank Rescue Deals

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Stocks nudged higher in choppy trading on Monday, as investors cautiously welcomed moves to shore up the global financial system after the collapse of four banks set off turmoil in financial markets this month.

The S&P 500 rose 0.9 percent, with every sector of the index ending up for the day. Monday’s bounce came a day after Swiss authorities arranged a hasty takeover of the nation’s embattled lender, Credit Suisse, by its rival, UBS. Major central banks also moved on Sunday to make dollar funding more readily available, and federal regulators announced an acquisition of parts of the collapsed Signature Bank in New York.

Those efforts brought some relief to worried investors, even as they remained mindful that more turmoil could yet emerge. Already, analysts are concerned about the potential knock-on impact to the economy that could come as banks pull back from lending in order to insulate themselves from any further fallout from the collapse of Silicon Valley Bank.

The cautious tone on Monday also came a day before the Federal Reserve begins a crucial meeting. The Fed has been raising interest rates to rein in stubbornly higher inflation, but the volatility in the banking sector has led to a complete reassessment of what the central bank will do next as investors worry about policymakers further turning the screws on an economy already showing signs of stress.

Traders are evenly split on whether the central bank will raise interest rates at all when it announces a decision on Wednesday, a sharp change from just a few weeks ago, when many in markets expected the Fed to increase the rate by half a percentage point in response to hotter than expected inflation data.

Economists at Goldman Sachs said on Monday that they now expected the Fed to hold off raising rates this week “because of stress in the banking system.”

That stress was still evident in shares of some small banks. Notably, First Republic Bank, the target of a rescue attempt by larger rivals that injected billions in deposits into the lender last week, slid nearly 50 percent on Monday. Its stock has dropped 90 percent this month, erasing tens of billions of dollars of market value and putting its future as an independent bank in doubt. First Republic’s credit rating was downgraded by S&P Global on Sunday, for the second time in less than a week.

Another relatively small lender, Western Alliance, also tumbled. Its shares fell 6.7 percent after initially starting the day with a gain.

In Zurich, Credit Suisse’s share price slumped over 50 percent after its deal with UBS, which was agreed at a hefty discount to Credit Suisse’s market value on Friday. Shares of UBS gained more than 3 percent.

Some American banks that have wavered after the collapse of Silicon Valley Bank and Signature Bank fared better on Monday. Shares of PacWest rose, as did Comerica and Zions Bank.

Yet even as the volatile trading conditions in financial markets appeared to be easing, the fallout from the recent rout was still being felt by some investors.

One strategy that has been particular hard hit by the recent turbulence is that of Commodity Trading Advisors. The strategy is employed by some of the largest investment funds in the world and follows the momentum of markets, buying as prices rise and selling as they fall. This makes these funds susceptible to sharp changes that can catch them off guard. An index of the 20 largest CTA managers run by Société Générale has fallen nearly 9 percent since the sell-off began.

In debt markets, the Credit Suisse deal caused unease that some investors worried could linger because it upended the normal hierarchy in which investors were paid back when a company faltered. Investors who own stock in a company are typically last in line to be paid when a company is wiped out. But in this case, owners of stock in Credit Suisse received one UBS share for every 22.48 shares they owned, according to the terms of the deal.

In contrast, a special form of risky bank debt, known as AT1 bonds, were wiped out. On Monday, banking regulators and supervisors in the European Union, of which Switzerland is not a member, issued a statement reiterating that in their jurisdiction shareholders bear losses at banks before bondholders. The price of other European AT1 bank debt slid on Monday.

“I think it was a mistake to mess with the AT1s,” Peter Tchir, head of macro strategy at Academy Securities, said. “They have made everyone question this market.”

Jason Karaian and Kevin Granville contributed reporting.

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