Summary: Major indices suffer four-day decline; bank index hits over two-year low, regional bank ETF drops over 9% during trading, Pacific Western Bank (PACW) shares plunge 50%, Western Alliance Bank (WAL) drops nearly 40%; AMD, rumored to be developing AI chips with Microsoft, rises 12% during trading; Apple rises nearly 3% post-market. ECB slows rate hike, market interest rate peak expectations decline slightly, two-year German bond yield plunges 17 basis points, hitting a four-week low. Investors increase bets on rate cuts amid banking turmoil, swap contracts anticipate rate cuts in July or as early as June, two-year US bond yield hits six-week low, dropping over 10 basis points during trading. Gold reaches all-time high. WTI crude oil experiences brief 7% crash before closing slightly lower. Updates to follow.
Crisis in US regional banks intensifies, contributing to the decline in US stock markets.
On Thursday, Canada's second-largest bank, Toronto-Dominion Bank, announced the termination of its merger agreement with First Horizon Bank (FHN); following the news of Pacific Western Bank (PACW) considering a sale and similar rumors surrounding Western Alliance Bank (WAL), share prices of these US regional banks suffered double-digit declines.
Although Western Alliance Bank later denied reports of considering a sale and pledged to explore all legal options against related media, its decline only narrowed slightly. Goldman Sachs' regulatory filings revealed that US government agencies are investigating whether the bank's deal with Silicon Valley Bank contributed to the latter's collapse in March, dampening risk appetite and making Goldman Sachs one of the primary drivers behind the Dow's decline.
The European Central Bank (ECB) slowed its rate hike to 25 basis points, the slowest pace since the start of the current tightening cycle, largely in line with market expectations but disappointing some investors who had anticipated a 50 basis point hike. The ECB's decision statement suggested further rate hikes, while ECB President Lagarde denied plans to pause hikes, citing significant upside risks to inflation and dismissing the possibility of following the Fed's pause in rate hikes.
Following the ECB's announcement, Eurozone bond yields and the euro exchange rate both declined. The euro to US dollar exchange rate retraced Wednesday's gains, approaching the multi-week low set on Tuesday. German bond yields hit a one-month low, with the interest rate-sensitive two-year German bond yield dropping nearly 20 basis points during the day. The ECB's suggestion of further rate hikes and construction giant Skanska's sharply lower-than-expected first-quarter earnings contributed to a decline in European stocks, failing to extend Wednesday's rebound.
Market expectations for the ECB's pre-September interest rate peak have declined slightly, from 3.75% to around 3.65%, suggesting that the market has fully priced in another rate hike but remains divided on a second hike. Some analysts believe the ECB may hike by another 25 basis points in June, with the decision on whether to hike by the same amount in July depending on developments in the US banking system. Others argue that the ECB appears relatively dovish and more cautious, focusing more on the impact of previous tightening.
Federal Reserve Chairman Powell poured cold water on expectations of a rate cut this year, saying Fed officials expect it will take some time for inflation to fall, making a rate cut inappropriate under current circumstances. However, market participants believe the turmoil in the banking sector could prompt the Fed to cool the economy. Investors are increasing bets on a Fed rate cut. Swap contracts indicate that investors expect a rate cut in July or even a one-in-four chance of a rate cut in June. This highlights the uncertainty in the market as well as the expectations for the central bank to intervene in order to boost economic growth and stabilize the situation.
On the other hand, some economists argue that rate cuts may not be the most effective solution in the current environment, as they could lead to further inflationary pressures and potentially exacerbate the existing economic challenges. They suggest that a more targeted fiscal policy, such as infrastructure spending or direct support for struggling sectors, may provide a better long-term solution.
Despite these debates, financial markets are closely monitoring the central bank's upcoming meetings and announcements, as any decisions on interest rates will have significant implications for borrowing costs, asset prices, and overall economic growth.
In conclusion, the current economic landscape is characterized by a mix of uncertainty and cautious optimism. While some indicators suggest a potential rebound in the near future, others point to ongoing challenges and the need for more intervention from policymakers. As a result, investors and businesses alike are keeping a close eye on central bank decisions, as these will likely shape the trajectory of the economy in the coming months.
S&P 500 hits five-week low, regional bank ETFs fall over 9%, AMD surges during trading
The three major U.S. stock indices opened lower collectively. The Dow Jones Industrial Average and the S&P 500 maintained a downward trend throughout the day. In the morning session, the S&P fell slightly more than 1% at its intraday low. The Dow fell nearly 477 points, or over 1.4%, at the beginning of the afternoon session, approaching its intraday low, while the S&P 500 neared its intraday low. The Nasdaq Composite fell more than 0.8% at its intraday low in the morning session but briefly turned positive in the afternoon session, benefiting from gains in some semiconductor stocks.
At the close, the three major indices posted their fourth consecutive day of collective declines. The Dow fell 286.5 points, or 0.86%, to 33,127.74 points, hitting an intraday low since March 30. The S&P 500 fell 0.72% to 4,061.22 points, approaching the closing low since March 30 set last Wednesday, April 26. The Nasdaq fell 0.49% to 11,966.4 points, hitting a low since April 26 for two consecutive days.
In the S&P 500's major sectors, only real estate, up more than 0.9%, and utilities, up more than 0.7%, closed higher on Thursday. Financials and communication services led the declines, both falling nearly 1.3%, followed by energy and industrials, both down more than 1%, and consumer staples, down nearly 0.3%.
Banking stocks plunged in the morning session, narrowing their declines in the afternoon session but still underperforming the broader market for the fourth consecutive day. The KBW Bank Index (BKX) fell nearly 6% in the morning session and closed down 3.8%, hitting a low since September 2020. The KBW Nasdaq Regional Banking Index (KRX) fell more than 7% at its intraday low in the morning session and closed down 3.5%. The regional bank ETF, SPDR S&P Regional Banking ETF (KRE), fell more than 9% in the morning session and closed down nearly 5.5%. All three indices fell for four consecutive days, hitting lows since November 2020 and October 2020, respectively.
Among regional banks, Pacific Western Bank (PACW) fell more than 60% in the morning session and closed down 50.6%, hitting an all-time low after considering a sale on Wednesday. After news of a potential sale for Western Alliance Bank (WAL) emerged on Thursday, the stock fell more than 60% in the morning session, but after the bank denied the news, it closed down 38.5%, hitting a new low since September 2013. After terminating an acquisition agreement with Canada's second-largest bank, Toronto-Dominion Bank, First Horizon Bank (FHN) fell more than 40% in the morning session and closed down 33.2%, hitting a new low since October 2020.
Semiconductor stocks are set to fall for three consecutive days after overall gains for four days. The Philadelphia Semiconductor Index and the Semiconductor Industry ETF SOXX both briefly turned positive in the afternoon session, closing down about 0.5% and 0.6%, respectively. AMD surged during trading, up more than 12% at one point and closing up 6.1%, after media reported that Microsoft and AMD were collaborating on AI chip development. Qualcomm, whose core mobile chip sales fell 17% year-over-year in the first quarter despite meeting EPS profit expectations, closed down 5.5%.
Among stocks reporting earnings, Paramount Global (PARA), which posted lower-than-expected first-quarter earnings and revenue and decided to cut its dividend for the first time since 2009, fell nearly 30% in the afternoon session. Fitness equipment manufacturer and platform Peloton (PTON) fell more than 10% due to a larger-than-expected third-quarter EPS loss. Tripadvisor (TRIP), which posted a higher-than-expected quarterly loss due to costs associated with a settlement with the U.S. Internal Revenue Service, fell nearly 9%. Canadian e-commerce company Shopify (SHOP), which reported better-than-expected first-quarter results and plans to sell its logistics properties, rose more than 20%. Shake Shack (SHAK), a restaurant chain with better-than-expected quarterly same-store sales and lower-than-expected quarterly losses, rose more than 10%. Royal Caribbean Cruises (RCL), which posted a lower-than-expected first-quarter loss and better-than-expected second-quarter and full-year EPS profit guidance, rose more than 7%. SolarEdge Technologies (SEDG), a solar stock that reported better-than-expected quarterly results and said supply chain issues have improved to some extent, rose nearly 7%.
Among the more volatile stocks, industrial parts manufacturer Arconic (ARNC), which will be acquired by Apollo Global for $30 per share in cash, closed up more than 17%. Engineering software company Procore Technologies (PCOR) rose 6.7% after Goldman Sachs upgraded its stock rating from neutral to buy, citing strong first-quarter earnings and expecting further profit growth.
