S&P 500 Hits 4,000, Bank Stocks Soar, Treasury Yields Rise, As Worries Over Banking Crisis Ease – Traders Await FOMC

It's a day of deep risk-on in markets, with stocks posting strong gains, bonds and gold plunging as Treasury yields climbed, after Treasury Secretary Janet Yellen injected confidence into the banking system.

The Treasury Department is also reportedly considering options to temporarily guarantee deposits above and beyond the $250,000 FDIC limit.

Cues From Tuesday's Trading:

Increasing optimism in the banking system's stability prompted traders to reprice higher Fed interest rates down the road. Fed futures are now almost entirely pricing in a 25-basis-point hike tomorrow, with the terminal rate priced at 4.9% in May.

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The S&P 500 index briefly hit the 4,000 milestone. With today's performance of 1%, the S&P 500 has almost fully recovered the losses after Silicon Valley Bank's crisis.

The Dow Jones Industrial added 230 points, up 0.7%, while Nasdaq Composite gained more than 1% approaching month-to-date highs. The Russell 2000 index rose 1.7%. 

Almost all cyclical sectors were in the green, with the Financial Select Sector SPDR Fund XLF and Energy Select Sector SPDR Fund XLE showing the biggest gains. Defensive sectors, such as Utilities Select Sector SPDR Fund XLU, Consumer Staples Select Sector SPDR Fund XLP and Health Care Select Sector SPDR Fund XLV underperformed. 

Analyst Color:

A geopolitical development could be one of the biggest catalysts for the equity market, according to fund manager Louis Navellier. If China can get Russia to agree to a ceasefire, stocks could stage a big relief rally, he said.

Navellier also sees Wednesday’s Fed decision as another important catalyst. He expects the Fed to announce a 0.25% hike and issue a dovish statement, given the 2-year Treasury note has collapsed from 5.08% to 3.83% and the 10-year Treasury note from 3.66% to 3.42%.

The fund manager said he expects to see some dovish words such as “data dependent,” “lower market rates” and “inflation cooling,” and potentially a reference to the stress in the banking system.

“Overall, Wednesday’s FOMC statement is anticipated to be a big deal!”

In midday trading on Tuesday, the SPDR S&P 500 ETF Trust SPY rose 0.88% to $397.23, the Invesco QQQ TrustQQQ gained almost 1% to $308.95, and the iShares Russell 2000 ETF IWM soared 1.5% to $176.37 according to Benzinga Pro data.

Major Equity ETFs Price Action on March 21, 2023 – Chart: Tradingview

Upcoming Economic Data:

The Federal Open Market Committee, the policy-setting arm of the Federal Reserve, is scheduled to start a two-day meeting on Tuesday. A decision, though, is expected only after the conclusion of the meeting on Wednesday.

The National Association Of Realtors released the existing home sales report. In February 2023, transactions climbed 14.5% to a seasonally adjusted annual rate of 4.58 million, halting a 12-month decline and recording the highest monthly percentage increase since July 2020. Economists were expecting a milder 5% gain on the month to 4.2 million. 

Stocks In Focus:

• First Republic Bank FRC soared 45% to $16.7 as optimism over banking stocks resumed. All major banks posted strong gains with Bank of America BAC 3.4%, Citigroup C 3.5%, Morgan Stanley MS 3.4%, Wells Fargo WFC 3%, Goldman Sachs GS 3%, JP Morgan Chase & Co. JPM 2.8%.
• Tesla Inc. TSLA rocketed 7.6%, reacting to Moody’s upgrade of its credit rating and China weekly insurance registration data.
• Exxon Mobil Corp XOM rose 4.5%, on the back of oil price gains with WTI-grade crude rising 2.4% to $69.7 a barrel. 
• Meta Platforms Inc. META added about 1.6% after Morgan Stanley upgraded the stock from Equal-Weight to Overweight.
  Earnings report:
• Canadian Solar Inc. CSIQ reported 1.11 EPS in Q4 2022, posting a 58% increase above consensus forecasts of 0.70. Revenues were 2.5% higher than forecasts ($1.97 vs $1.92 billion). The stock price soared 16%. 
• Tencent Music Entertainment Group TME reported weaker-than-expected EPS in Q4 2022 (0.104 vs 0.114), while revenues were broadly in line with forecasts ($1.076 vs $1.064 billion). TME shares cratered almost 9%. 
• GameStop Corp. GME and Nike Inc. NKE will report after market close. 

Top Analyst Calls

• Alphabet Inc. GOOGL GOOG: Stifel reinstates with a Buy rating and $130 price target.
• Foot Locker Inc. FL: Citi upgrades from Neutral to Buy and raises price target from $47 to $50; Tesley Advisory Group upgrades from Market Perform Outperform with a $50 price target.
• Matterport Inc. MTTR: Piper Sandler reiterates at Overweight with $4 price target.

Commodities, Bonds, Other Global Equity Markets:

Crude oil continued to climb on Tuesday. The black gold added 2.4% to $69.4 a barrel.

Treasury yields rebounded, with the benchmark 10-year Treasury note yielding 3.60%, up 11 basis points. The two-year Note jumped nearly 20 basis points to 4.18%.

Gold was negatively impacted by rising Treasury yields and Fed hike expectations, and the precious metal retraced more than 2% to $1,930/oz, with the SPDR Gold Trust ETF GLD down 2%. 

All European equity indices closed in the green on Tuesday, with the iShares MSCI Eurozone ETF EZU gaining 2%. High-beta markets outperformed with Global X MSCI Greece ETF GREK up 4%, followed by iShares MSCI Italy ETF EWI up 3%.  

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Staff writer Piero Cingari updated this report midday Tuesday.