Markets Shrug Off First Republic Failure

Last weekend’s collapse of First Republic Bank had little impact on financial markets on Monday. Investors instead shrugged off the latest bank failures that failed to focus on corporate profits and the next big interest rate decision by the Federal Reserve this week.

The S&P 500 hit JPMorgan Chase at a subsidized price early in the morning when the Federal Deposit Insurance Corporation took control of ailing local lender First Republic. It rose early in the transaction after deciding to sell.

After dropping 75% last week, First Republic’s shares continued to fall overnight on Sunday, eventually halting at around $2 a share early Monday morning. The stock traded above $120 early in the year.

But investors dismissed concerns about contagion from the First Republic’s predicament. Monday morning’s rally added to his S&P 500 rise last week, rekindling concerns over the fate of the First Republic.

The KBW Rural Banks Index, which tracks stocks of smaller US regional banks, traded flat. Shares of PNC, the so-called super-regional bank that was looking to buy First Republic, fell 5%, while shares of JPMorgan climbed about 3%.

It illustrates the difficulties investors face as they balance the impact of one of the largest bank failures in history with higher-than-expected corporate profits. Adding to the uncertainty is persistently high inflation and aggressive steps taken by the Fed to contain it. Central banks are focused on keeping inflation in check by raising interest rates and slowing the economy, even at the risk of pushing the country into recession.

Pressure on the country’s banks could accelerate its recession as they come under increasing scrutiny, tighten lending standards and constrain the availability of credit in the economy.

“While this removes the uncertainty from one bank that has been making headlines for so long, what does it really mean for the future outlook for US banking and the availability of credit in the US? ?” said George Gonçalves, Head of Macro Strategy at MUFG Securities Americas. “It doesn’t make it any better.”

Despite the tremors emanating from the banking sector, investors still expect the Fed to raise interest rates again on Wednesday when it concludes its latest policy meeting. A deal bailing out the First Republic on Monday, along with solid manufacturing data, helped cement hopes for a 0.25 percentage point gain this week.

Yields on Treasury bonds, which determine the cost of borrowing for the U.S. government, also surged on Monday, suggesting risks surrounding the First Republic are contained, analysts said.

Analysts at BMO Capital Markets wrote in a report Monday morning that First Republic was “at the top of the regional banks’ list of concerns.” “This resolution appears to be a net positive for investor concerns about the stability of the banking system as a whole.”

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