Stocks Rise as Bank Shares Gain

Stocks Rise – Increased investor optimism about the banking system helped lift U.S. stocks Tuesday, with shares of regional banks including First Republic Bank increasing; green up pointing triangle at the front of a broad market rally.

The S&P 500 gained 1.1% in early trading. The Dow Jones Industrial Average rose 1.1% and the tech-focused Nasdaq Composite advanced 1.2%, with all three indexes on track for their second straight day of gains.

Authorities have sought to assuage jittery investors about the stability of the banking system, following the collapse of Silicon Valley Bank and others, and the hastily arranged combination of Switzerland’s Credit Suisse and UBS. Investors pointed to recent reassurances as helping calm markets Tuesday.

Treasury Secretary Janet Yellen is expected to say Tuesday that 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.

“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.”

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Shares in big U.S. banks such as JPMorgan Chase posted strong gains, while some smaller lenders surged. First Republic stock jumped 37%, after shedding nearly half of its value Monday. Western Alliance and PacWest, two other midsized banks that have come under pressure, each climbed more than 13%.

The Wall Street Journal reported Monday that JPMorgan Chief Executive Jamie Dimon is leading discussions about new efforts to stabilize the troubled First Republic. The bank has become a focus of investors worried that a flight of deposits from midsized banks 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 7.4%. Additional tier 1 bonds rebounded, with a roughly $1 billion AT1 exchange-traded fund from Invesco gaining 3.7%

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With the Federal Reserve kicking off its two-day policy meeting Tuesday, another key focus for investors is interest rates, and how the central bank balances financial strains against historically high inflation.

Investors have debated in recent days whether the Fed might hit pause given financial-stability concerns, but consensus has hardened that it will continue to tighten policy when it announces its decision on Wednesday. Fed funds futures show investors are now pricing in an 82% chance that the central bank lifts interest rates by 0.25 percentage points for a second consecutive time, according to data from CME Group.

“If stability persists and this kind of sense of calm continues, and nothing else is unearthed in the next 48 hours, then I think we should expect the Fed to hike” by a quarter-percentage point, Ms. Shah at Principal Asset Management said. “They still have the inflation problems in front of them.”

In a sign of shifting interest-rate expectations, bond yields rose sharply. The yield on the benchmark 10-year Treasury note rose to 3.590%, from 3.477% Monday, and the two-year yield jumped to 4.166%, from 3.922%. Yields rise when prices fall.

Overseas, the Stoxx Europe 600 jumped 1.6%. 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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