[New York Stock Market] No Black Monday... Nasdaq Rises Alone on Interest Rate Freeze Expectations

There was no Black Monday. On Monday the 13th (local time), the major indices of the U.S. New York stock market showed volatility as they monitored the aftermath of the Silicon Valley Bank (SVB) bankruptcy crisis, ultimately closing mixed near the flat line. As speculation spread that this incident could halt the Federal Reserve's (Fed) aggressive tightening, the Nasdaq index, which is sensitive to interest rates among the three major indices, was the only one to rise. Amid investors' caution, prices of safe-haven assets such as gold and government bonds surged sharply.

On that day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 31,819.14, down 90.50 points (0.28%) from the previous session. This marked a decline for five consecutive trading days. The S&P 500 index, centered on large-cap stocks, fell 5.83 points (0.15%) to 3,855.76. In contrast, the tech-heavy Nasdaq index closed up 49.96 points (0.45%) at 11,188.84.

[Image source=Reuters Yonhap News]

Amid concerns over financial risks, the New York stock market started the day with a broad decline but turned to some gains thanks to the U.S. administration's response, only to fall again, experiencing a rollercoaster ride. President Joe Biden, in a speech before the market opened, emphasized, "Thanks to swift actions over the past few days, Americans can be confident that the banking system is safe," adding, "All customers who had deposits at SVB can rest assured. Your deposits are safe." He also clearly stated plans to strengthen financial regulations to prevent such incidents from recurring. On Sunday, the day before, the U.S. Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) announced various measures, including full guarantees for deposits exceeding the insurance limit and the introduction of a new lending program.

However, these measures did not fully quell investors' anxieties. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's "fear gauge," jumped more than 10% during the day, surpassing the 28 level. This was the highest level since October last year.

Within the S&P 500 index, stocks related to finance, energy, industry, and materials all fell simultaneously. As concerns over the soundness of the U.S. financial system grew, bank-related stocks dropped nearly 4%.

First Republic Bank, which had been engulfed in crisis rumors following the SVB incident, closed down 61.83% from the previous session. First Republic, which showed a plunge exceeding 60% even before the market opened, had its trading halted several times during the day. PacWest Bancorp also fell 45.25%. These regionally based small- to mid-sized banks have been considered potential successors to New York's Signature Bank if the SVB crisis spreads. Ally Financial, KeyCorp, Fifth Third Bancorp, Comerica, and others also suffered heavy selling pressure. Not only small- to mid-sized regional banks but also large banks were not safe havens. Bank of America (BoA) fell 5.81%, Citigroup 7.45%, and Wells Fargo 7.13%.

Solita Marcelli, Chief Investment Officer (CIO) at UBS Global Wealth Management, said, "While some bank sell-offs seem excessive, it is unclear when this 'crisis of confidence' will improve," adding, "It is very important for financial institutions to maintain the trust of depositors and investors." Marcelli also noted, "We cannot rule out the possibility that other banks may face similar concerns." Chris Senek, Senior Investment Strategist at Wolfe Research, agreed with investors' optimism that the SVB incident will not escalate to the scale of the Lehman crisis but pointed out concerns such as the decline in virtual assets and liquidity issues in the Treasury market affecting many financial institutions, including regional banks.

Amid heightened caution, a flight to safe-haven assets was also confirmed. The price of gold, a representative safe asset, surged to its highest level in a month. April delivery gold on the New York Commodity Exchange (COMEX) rose 2.7% to around $1,910 per ounce.

Government bond yields plunged. A decline in bond yields indicates a rise in the price of bonds, which are safe-haven assets. The two-year U.S. Treasury yield, which exceeded 5% last week, currently stands around 4.0%, dropping more than 56 basis points. At one point during the day, the two-year yield fell to about 3.93%. CNBC reported that the two-year yield fell more than one percentage point over three trading days, marking the largest drop since October 1987. At that time, the S&P 500 index plunged more than 20% in a single day during Black Monday, causing turmoil in the bond market as well. The benchmark 10-year yield traded around 3.54%.

This incident has further strengthened expectations that the Fed will find it difficult to pursue aggressive tightening at the March Federal Open Market Committee (FOMC) meeting scheduled for the 21st and 22nd. Initially, the market widely expected the Fed to accelerate the rate hike to a big step (a 0.5 percentage point increase) at this month's FOMC. However, as the SVB bankruptcy confirmed that rapid rate hikes are damaging not only the real economy but also the financial system, arguments against returning to big steps are gaining traction.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently reflects more than a 64% probability that the Fed will opt for the usual 0.25 percentage point rate hike at the March FOMC. The probability of no rate hike rose sharply from 0% the previous day to around 35% on this day. Meanwhile, the possibility of a big step dropped to 0%. Azai Rajadhaksha, an analyst at Barclays, said, "The financial market is trapped in a no-win situation between fears over regional bank operations and sticky inflation concerns among central banks."

With the Fed's tightening path becoming more uncertain, the key will be the Consumer Price Index (CPI) to be released on the 14th. Wall Street estimates that the February CPI will rise 6.1% year-over-year, a slowdown from the previous month's increase of 6.4%. The core CPI, excluding volatile energy and food prices, is expected to rise 5.5% year-over-year and 0.4% month-over-month.

The short-term inflation expectations released by the New York Federal Reserve on this day declined. According to the survey published by the New York Fed, the one-year ahead inflation expectation rate was 4.2%, down 0.8 percentage points from the survey a month ago.

Major European stock markets closed lower on the day. Particularly, the declines were significant in Italy, Spain, and Germany. Italy's Milan stock exchange FTSE MIB closed at 26,178.00, down 4.05% from the previous session. Spain's IBEX 35 index fell 3.51% to 8,958.90, and Germany's Frankfurt stock exchange DAX index dropped 3.04% to 14,959.47. The pan-European Euro Stoxx 50 also declined 3.14%. Among individual stocks, Swiss Credit Suisse shares fell 9.6%, highlighting the sharp declines among major banks. HSBC, which announced it would acquire the bankrupt SVB's UK branch for 1 pound, also fell 4.1%.

International oil prices declined. On the New York Mercantile Exchange, April delivery West Texas Intermediate (WTI) crude oil closed at $74.80 per barrel, down $1.88 (2.45%) from the previous session. This was the lowest closing price since February 22. Risk assets like oil showed limited declines due to expectations of demand from China's reopening and a weaker dollar.

The U.S. dollar weakened as expectations for the Fed's aggressive tightening eased. The Dollar Index, which measures the dollar's value against six major currencies, fell about 0.9% to around 103.6.