Much of the attention was still on banks, which may be cracking under the pressure of the fastest flurry of hikes to interest rates in decades. Swiss banking giant UBS said Sunday it would buy its rival Credit Suisse for almost $3.25 billion in a deal quickly put together by regulators. Credit Suisse has been battling troubles for years, but they came to a head last week as its stock price tumbled to a record low.
Credit Suisse fell another 56% in its first trading after the deal was announced, while UBS rose 2.4% in Switzerland.
“Considering that there was none of the long and thorough process for due diligence, it’s to be expected that there remains a host of questions, not to mention a broad range of concerns over many of the risky and hard-to-price assets sitting” inside Credit Suisse, said Quincy Krosby, chief global strategist for LPL Financial.
In the U.S., most of the attention has been on smaller and mid-sized banks on fears that falling trust could push their depositors to pull their money all at once. That’s what’s called a bank run, and such a move could topple them.
First Republic Bank has been at the center of investors’ crosshairs in the hunt for the industry’s next victim following the second- and third-largest U.S. bank failures in history. Its shares fell 14% after S&P Global Ratings cut its credit rating for First Republic for a second time since Wednesday on worries its depositors have rushed to pull out cash.S&P said it could lower the rating even further despite a group of the biggest U.S. banks announcing last week they would deposit $30 billion in a sign of faith in First Republic and the larger banking industry.
While that money certainly helps, “it may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing,” the credit-ratings agency said.
New York Community Bancorp jumped 34.7% after it agreed to buy much of Signature Bank in a $2.7 billion deal, the Federal Deposit Insurance Corp. said late Sunday. Signature Bank became the industry’s third-largest failure earlier this month after regulators seized it.
Other smaller- and mid-size banks were also doing better and helping to lead the market. Zions Bancorp. rose 6.4%, Comerica climbed 4.2% and KeyCorp gained 3.1%.
Much of the rest of the U.S. stock market was holding steady, but how long that lasts is a question mark. A huge decision is looming on the calendar by the Federal Reserve.
The U.S. central bank will announce its latest move on interest rates Wednesday. For a while, the big bet on Wall Street was that it would reaccelerate its hikes because of how stubborn high inflation has remained.
Higher rates can undercut inflation by slowing the economy, but they raise the risk of a recession later on. They also hurt prices for stocks, bonds and other investments. That was one of the factors hurting Silicon Valley Bank, which earlier this month became the second-biggest U.S. bank failure in history. Bonds owned by it and other banks have seen their prices fall as interest rates rose sharply.
The Fed has already pulled its key overnight rate to a range of 4.50% to 4.75%, up from virtually zero at the start of last year.
But all the recent stress in the banking system has pushed Wall Street to believe the Fed likely won’t pick up the pace again on its rate hikes. Instead, the bet is that it will likely stick with an increase of 0.25 percentage points, according to data from CME Group.
Some bets are even calling for the Fed to hold steady on interest rates Wednesday. But such a move could end up being more destabilizing because it could raise uncertainty: “the market may question ‘what does Fed know that we don’t?’ strategists wrote in a BofA Global Research report.
Such a calculus may have led the European Central Bank last week to hike its key rate last week by 0.50 percentage points despite speculation that it may ease up given all the stress in banks.
Drastic recalibrations by investors for what the Fed will do with interest rates have caused historic swings in the bond market. Yields there have plunged since earlier this month.
Consider the two-year Treasury, which tends to move particularly closely with expectations for the Fed. Its yield was sitting above 5% earlier this month, at its highest level since 2007, after data on inflation and other measures of the economy kept coming in higher than expected.
Last week it plunged well below 4%, which is a massive move for the bond market. It rose to 3.86% from 3.84% late Friday.
In markets abroad, stocks were modestly higher in Europe after falling across much of Asia.