Will Bank Collapses Drive S&P 500 Lower This Week?

The collapses of several banks in the U.S. is expectedly weighing heavily on the equity markets. While Silvergate, Silicon Valley Bank, and Signature were under the radar in recent days, shares of First Republic Bank (NYSE: FRIC) fell 72% in the last week.

Despite gaining significant momentum in January, the S&P 500 index is up just 2.4% year-to-date. In this period, indices such as the Nasdaq Composite and Dow Jones have gained 12% and -4%, respectively.

Shares of another banking giant, Credit Suisse (NYS: CS), are down 96% from 52-week highs as it continues to wrestle with a challenging macro-environment. A banking consortium is likely to infuse $30 billion into First Republic, while the Swiss National Bank will loan $54 billion to Credit Suisse.

The rally in the equity markets has been driven primarily by tech stocks in 2023. Last year, several tech companies were trading at a depressed valuation as interest rate hikes and inflation negatively impacted profit margins and sales across verticals.

The Federal Reserve is forecast to hike interest rates further this year, which will likely fuel another round of sell-offs in the equity markets. While the near-term will remain bumpy, let’s see what will impact investors this week.

 

The Fed and interest rate hikes

The Federal Open Market Committee (FOMC), which is the rate-setting committee of the U.S. central bank, is set to convene on Tuesday and Wednesday. Here policymakers will discuss the current economic situation.

In light of SVBU+02019s collapse and turmoil in the banking industry, the Fed may decide to halt its rate hikes and maintain interest rates. However, despite this possibility, most traders are still anticipating a 25 basis points (bps) hike, according to CME GroupU+02019s fed funds futures data.

Since the Fed began quantitative tightening one year ago in an effort to curb soaring inflation, it has raised interest rates by a cumulative 450 bps, which is the fastest pace in decades.

Meanwhile, the Bank of England (BoE) will hold its latest policy meeting on Thursday, and itU+02019s expected to increase interest rates by 25 bps to 4.25%, the highest level since 2008. On the other hand, despite the uncertainty in the global financial sector, the European Central Bank (ECB) raised interest rates by 50 bps this week, prioritizing bringing down inflation in the eurozone, which is presently running at an annual rate of 8.5%.

 

TikTok under the scanner

This week, TikTok CEO Shou Zi Chew is scheduled to appear before Congress amidst increased government scrutiny of the social media app. There are concerns among U.S. lawmakers that TikTokU+02019s parent company, ByteDance, which is based in China, may be obliged to adhere to 

ChinaU+02019s data surveillance policies. The introduction of the Deterring AmericaU+02019s Technology Adversaries Act (DATA) earlier this month by Congress could provide the President with the power to prohibit the use of TikTok in the U.S.

 

Home sales data

During the upcoming week, you can also expect updates on new and existing home sales for February. It is anticipated that existing home sales will show a recovery to 4.18 million units in the previous month, compared to JanuaryU+02019s figure of 4 million, which was the lowest since October 2010.

The housing market has been experiencing a slowdown as mortgage rates continue to rise, resulting in a consecutive 12-month decline in sales from 6.34 million in January last year. On the other hand, new home sales are expected to decline to 648,000 units, following JanuaryU+02019s higher-than-anticipated figure of 670,000 units.