[New York Stock Market] Yellen's "Additional Assurance" Sparks Bank Stocks Rally... Nasdaq Up 1.58%

Major indices on the U.S. New York Stock Exchange closed higher on the 21st (local time), buoyed by a rally in bank stocks ahead of the Federal Reserve's (Fed) interest rate decision scheduled for the following day. The easing of concerns over banking risks was driven by additional deposit guarantee remarks from U.S. Treasury Secretary Janet Yellen. Shares of First Republic Bank, which had been engulfed in crisis rumors following the Silicon Valley Bank (SVB) collapse, surged by about 30%.

On the day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 32,560.60, up 316.02 points (0.98%) from the previous session. The large-cap-focused S&P 500 index rose 51.30 points (1.3%) to 4,002.87, while the tech-heavy Nasdaq index gained 184.57 points (1.58%) to close at 11,860.11.

Within the S&P 500, eight of the eleven sectors excluding utilities, real estate, and consumer staples showed gains. Notably, energy and financial stocks led the rally. First Republic, which had plunged sharply the previous day, closed up 29.47%. KeyCorp rose 9.34%, and U.S. Bancorp increased 8.91%. The SPDR S&P Regional Banking ETF also climbed nearly 6%. Additionally, Tesla surged 7.82% following Moody’s upgrade of its credit rating to investment grade Baa3. Foot Locker rose more than 7% after Citigroup upgraded its investment rating from 'neutral' to 'buy.'

[Image source=Reuters Yonhap News]

Investors closely monitored additional measures from U.S. authorities and the banking sector related to financial risks, as well as the movements of bank stocks, while awaiting the two-day March Federal Open Market Committee (FOMC) meeting starting that day.

In a speech to the American Bankers Association, Secretary Yellen stated, "The actions we have taken are not focused on supporting specific banks. We intervened to protect the broader banking system," adding, "If smaller banks experience deposit withdrawals with contagion risk, similar (additional) measures could be taken." This confirmed that in the event of a rapidly escalating banking crisis, deposits exceeding the insured limit of $250,000 per depositor could be protected. Bloomberg News also reported, citing sources, that authorities are considering options to guarantee full deposits. However, the Treasury currently does not deem such measures necessary.

These remarks immediately provided relief to investors. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street’s "fear gauge," dropped more than 11% to the 21 level. Additional foreign reports indicated that CEOs of major banks, including Jamie Dimon of JPMorgan Chase, are scheduled to hold two-day meetings in Washington D.C. starting that day regarding First Republic Bank, discussing various options including business downsizing if First Republic fails to raise capital.

Investors are now awaiting the Fed’s interest rate decision and future policy direction to be announced the next day. The prevailing market view is that the Fed will implement a so-called "baby step" by raising the benchmark interest rate by 0.25 percentage points. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of the afternoon of the day, federal funds futures markets reflect more than an 86% probability that the Fed will raise rates by 0.25 percentage points at the March FOMC meeting, up from the previous day’s 73% range.

The outlook for a rate pause, which surged immediately after the SVB incident, has dropped to 13.6%. The possibility of a "big step" (a 0.5 percentage point rate hike) is at 0%. Jim Reid, strategist at Deutsche Bank, said, "With market sentiment turning positive today, investors expect the Fed to raise rates tomorrow," forecasting a 0.25 percentage point increase. Brandon Murphy of Inside Investments commented, "If the Fed does not raise rates by 0.25 percentage points, some will question the Fed’s resolve to lower inflation, potentially leading to entirely new problems."

However, on Wall Street, there are also growing calls against the Fed raising rates this month. Bill Ackman, CEO of Pershing Square Holdings, tweeted, "The Fed should pause rate hikes," adding, "This is not an environment for the Fed to raise rates and put pressure on the system. Financial stability is the Fed’s first responsibility." He referenced recent events such as the closures of SVB and Signature Bank, the liquidation of Silvergate Bank, the First Republic Bank crisis rumors, and UBS’s acquisition of Credit Suisse (CS), pointing out that "investors do not even know exactly where losses occurred or what contagion effects might arise." He also argued that these events have already had a tightening effect on financial conditions.

In response to Ackman’s rate pause tweet, Tesla CEO Elon Musk also expressed opposition to rate hikes via Twitter. Musk went further, stating, "The Fed needs to cut rates by at least 0.5 percentage points." He had previously called for Fed rate cuts. However, experts widely agree that the likelihood of the Fed cutting rates immediately is very low. Among global investment banks, only Nomura currently expects the Fed to cut rates in March.

In the New York bond market, Treasury yields rose ahead of the FOMC meeting. The two-year U.S. Treasury yield, sensitive to monetary policy, rose to around 4.17%, while the 10-year yield increased to about 3.59%.

International oil prices rose for the second consecutive day. On the New York Mercantile Exchange, April delivery West Texas Intermediate (WTI) crude oil closed at $69.33 per barrel, up $1.69 (2.50%) from the previous day. The May WTI contract, which becomes the front-month contract the following day, closed at $69.67 per barrel, up $1.85 (2.7%).