Equity futures fell considerably overnight as did overseas exchanges in Wednesday trading, as fears about a banking contagion effect hurt the markets. Shares of Credit Suisse Group AG (CS) notably fell when news broke that its biggest backer, the Saudi National Bank, would not provide further financial help for the bank. Additionally, several banks in Italy traded sharply lower as contagion fears increased.
Then a few key U.S economic reports were released, including the February Producer Price Index (PPI) and U.S. retail sales. The PPI showed that prices were down 0.1% for the month, but were up 4.6% year over year. Retail sales were down 0.4%, impacted by a significant decline in auto sales. Additionally, the Empire State Manufacturing Index fell significantly to -24.6 in March, which was far lower than expectations. These moves caused the futures markets to trade even lower, suggesting a very weak start to the trading day.
Trading yesterday was mostly positive, as sentiment improved following the announced bailout of Silicon Valley Bank depositors. Additionally, the Consumer Price Index (CPI) was released yesterday, showing that inflation was up 0.4% month over month in February and 6.0% year over year. When excluding volatile energy and food prices, core inflation was up 0.5% month over month and 5.5% year over year. Higher housing prices were a key factor of the rise, and traders thought this slowing of inflation supported stock prices, as it could mean the Federal Reserve interest-rate direction moves towards more accommodative policy. Overall, these buoyed the markets, and the indices ended near their highs. All told, the S&P 500 finished up 64 points (+1.65%), the NASDAQ increased 239 points (+2.14%), and the Dow Jones Industrial Average rose 336 points (+1.06%).
Market breadth was quite positive, as advancers outpaced decliners by a 3.0-to-1.0 ratio. All 11 sectors finished the day higher, and communications stocks were among the best performers. Conversely, healthcare equities were among the weakest performers on a relative basis.
In commodity news, oil prices fell sharply yesterday as higher inflationary data suggested global demand for the commodity would be hurt.
Elsewhere, U.S. Treasury bond yields were up across the board, with much larger than usual moves, after traders moved out of the safe-haven assets. Bond yields have been volatile over the past week as traders have rapidly changed their positions. Most traders think a 25-basis point interest rate hike at the March Fed Open Market Committee is the likeliest outcome. The Chicago Board Options Exchange fell sharply yesterday as demand for options protection declined.
Several economic reports will be released in the days ahead. These include the Thursday releases of initial jobless claims, housing starts, and building permits. On Friday, the U.S. Leading Economic Index and consumer sentiment reports will be released. Elsewhere, several hundred mostly-smaller companies, including several biotechs, will release quarterly reports in the days ahead. Overall, we think most eyes will be on the possible contagion effects in the banking sector and how any inflationary data will affect the Fed’s decision-making process.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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