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Tuesday, December 12, 2023

Markets Extend Gains as Focus Turns to Fed Meeting

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Stocks rose for a second day, again led by bank shares, as relief over recent financial rescue measures appeared to take hold, even as the fate of some beleaguered lenders remained a source of uncertainty.

The S&P 500 index rose 1 percent in early trading on Tuesday, in step with markets in Europe and Asia, which mostly posted gains.

An index that tracks the largest banks in Europe, which have been swept up in the turmoil after U.S. regulators seized the midsize lenders Silicon Valley Bank and Signature Bank, jumped more than 3 percent. UBS, which was cajoled by Swiss regulators over the weekend into acquiring rival Credit Suisse, gained 8 percent.

Treasury Secretary Janet L. Yellen expressed confidence in the nation’s banks on Tuesday, and suggested that the government would step in to protect smaller banks if needed, according to her prepared remarks.

First Republic Bank, the San Francisco lender that has become the focus of Wall Street’s concerns about the U.S. banking system, rose 30 percent on Tuesday, a heady gain that nonetheless only recovered a fraction of the value of its beaten-down shares. First Republic’s stock has still fallen about 90 percent this month, erasing tens of billions of dollars in market value.

The bank has been entertaining some possible buyers after a $30 billion cash infusion from the country’s largest banks failed to restore confidence among investors. Analysts at Morningstar “struggle with why a buyer would be motivated to step in, except perhaps if it were being pushed for by regulators,” they wrote in a new report about First Republic’s prospects.

A critical question now for investors, particularly those worried about the effects of higher interest rates on banks’ balance sheets, is what the Federal Reserve will do when its policymakers meet this week. Some investors and economists believe that the Fed could choose not to raise rates at all, although the return of some measure of calm to the markets this week has bolstered bets that Fed policymakers will raise rates by a quarter-point when they announce their decision on Wednesday.

The debate shows just how quickly the banking crisis has upended views in the markets. A few weeks ago, the question was whether the Fed would ramp up the pace of its interest rate increases. Now, traders are betting on a series of rate cuts beginning in the summer.

Economists have begun to warn that the trouble in the financial system could weigh on the broader economy, if lenders begin to pull back as they look to shore up their own finances.

“Recent events strengthen our conviction that a recession remains the most likely outcome for the economy over the next year,” noted analysts at Deutsche Bank.

That is not necessarily a bad thing for markets, as analysts at Bank of America pointed out that a gauge of investor pessimism had plumbed depths associated with the low point in markets during previous cycles. In addition to the recent gains for stocks, oil prices and yields on government bonds — two key measures of concerns about the economy — rose for a second session on Tuesday.

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