U.S. Stocks Tumble Amid Banking System’s Troubles, CME FedWatch Tool Predicts Rate Hike
On Wednesday, U.S. stocks tumbled amid worries that the banking system's troubles were becoming more widespread. The Dow Jones Industrial Average dropped more than 1.7%, or more than 500 points, while the S&P 500 slumped by 1.5%. The Nasdaq composite skidded 4.7%, and the small-cap Russell 2000 dived 8%.
The CME FedWatch Tool currently expects a 83% chance of a 25-basis-point rate hike at the March meeting. The 10-year U.S. Treasury yield edged up 2 basis points to 3.52%, and the Two-Year Treasury yield also decreased, as it hovers around 3.84%, bringing the spread between them to -43 basis points.
The 10-year Treasury yield plunged 29 basis points to 3.69% this past week, and the 2-year yield tumbled 27 basis points to 4.59%. Joe Biden spoke before the markets opened, stating: “Americans can have confidence that the US banking system is safe. No losses will be borne by the taxpayer”.
The sell-off hit the Big Four trillion-dollar banks, including Citigroup, Wells Fargo, Bank of America and JP Morgan. Shares of First Republic Bank, Western Alliance Bancorp and PacWest Bancorp also fell sharply. Schwab lost 6% despite a Citigroup upgrade, and JPMorgan Chase (JPM) fell 1% despite a Wells Fargo upgrade.
The European Central Bank raised interest rates by 50 basis points, taking the key rate to 3%. The European Central Bank also announced a 50 basis point rate hike at its latest meeting. Meanwhile, the Cboe Volatility Index (VIX) is a measure of the equity market's expectation of volatility based on S&P 500 index call and put options.
Overall, markets are now pricing in just one quarter-point rate hike, with a solid chance that the Fed will pause on March 22. Investors anticipate a pause in May, anticipating multiple rate cuts to come after that. It appears that the U.S. banking system is becoming more secure and stable, as President Joe Biden has promised to make SVB customers ‘whole' and that ‘no losses will be borne by the taxpayer'.
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