U.S. stocks wobbled Monday morning following UBS’s deal to buy smaller rival Credit Suisse, in a bid to avoid further market-shaking turmoil in global banking.
“The [market] will need to digest the M&A from the weekend and then await the results of the FDIC auctions to see whether it agrees that contagion is contained,” the US Market Intelligence team at JPMorgan said in a note to clients.
The yield on the benchmark 10-year U.S. Treasury note moved up to 3.4% Monday morning. On the front end of the yield curve, two-year yields were mostly unchanged.
UBS struck a deal to purchase the troubled Credit Suisse at a steep discount Sunday afternoon. Markets looked at the more than $3 billion takeover with skepticism as shares of Credit Suisse (CS) tumbled Monday morning, while UBS Group AG (UBS) stock gained.
“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” UBS chair Colm Kelleher said in a statement.
Bank sentiment somewhat rebounded, with the KBW Bank index (^BKX) moving higher Monday. Large-cap index members including Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C) all traded higher.
Other regional bank stocks sank, including First Republic Bank (FRC), as S&P Global Ratings downgraded FRC for the second time in four days. The bank’s credit rating moved three notches downward to B+. PacWest Bancorp (PACW) and Zions Bancorporation (ZION) , Western Alliance Bancorporation (WAL) and Regions Financial (RF) all traded up Monday morning.
Separately, Signature Bank’s deposits have found a buyer. Flagstar Bank, a subsidiary of New York Community Bank (NYCB), bought the majority of deposits and some loan portfolios of the failed crypto lender. Shares of New York Community Bancorp rallied Monday.
On the other hand, Silicon Valley Bank was warned by BlackRock consultants about its risk controls. According to a Financial Times report, the now-failed bank got a “gentleman’s C” in a 2022 report that showed substantial deficiencies.
Meanwhile, Silicon Valley Bank remains unsold. The Federal Deposit Insurance Corp. (FDIC) has extended the bidding process, the agency said Monday in a press release, will be taking separate offers for the bank’s commercial and private lending side. Separately, Bloomberg reported that Warren Buffet has been in talks with the Biden Administration about investing in the US regional banking sector.
All three major indexes and bond yields fell Friday, wrapping up a tumultuous week as concerns rose following the turmoil in the bank sector. Investors pulled back from their positions in First Republic (FRC) and other regional bank shares, which came a day after a commitment from a group of banks banded together to deposit $30 billion into First Republic, in a bid to boost confidence in the banking system.
Despite the down session, the S&P 500 settled 1.4% higher on the week and the Nasdaq jumped more than 4%. Friday’s slide pulled the Dow Jones average slightly negative for the week.
The headliner event of the week will be a crucial two-day meeting of the Federal Reserve’s policy-making committee, with some investors debating over the potential hawkish tilt. The bets continue, with Bank of America forecasting the Fed will lift target range will lift by 25 basis points to 4.75-5.0% and maintain its balance sheet runoff. Economists at BofA are under the assumption that the emergence of financial stress is likely to indicate to the committee that monetary policy is close to “sufficiently restrictive.”
Meanwhile, Moody’s economist Mark Zandi is taking a firmer stance that the central bank should loosen its tightening policy due to higher recession risks. “If they raise rates, that qualifies as a mistake, and I would call it an egregious mistake,” he warned.
The Fed, along with other central banks, have gotten involved amid the ongoing banking turmoil. The world’s leading central banks announced actions that would aim to keep U.S. dollars flowing easily throughout the global banking system.
Outside the Fed’s rate debate, economic reports are due to pour in, including housing data, services and manufacturing activity readings from S&P Global.
Shares of Starbucks (SBUX) gained Monday after the coffee company named Laxman Narasimhan as the officially CEO of the Seattle-based coffee chain. Foot Locker (FL) shares added after the retailer profit expectations for this year came in lower than anticipated.
Elsewhere overseas, Chinese President Xi Jinping is in Moscow this week, talking with Russian President Vladimir Putin amid sharpening East-West tensions over the war in Ukraine and the latest sign of Beijing’s emboldened diplomatic ambitions.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv