U.S. stocks slightly lower midsession after bank jitters reignited by Deutsche Bank

U.S. stocks were down slightly on Friday afternoon, after a surge in the cost of Deutsche Bank’s credit-default swaps helped to reignite banking-sector worries that have rattled markets in recent weeks.

How stocks are trading
  • The Dow Jones Industrial Average
    dipped 7 points, or less than 0.1%, to 32,098.

  • The S&P 500
    slipped almost 2 points, or less than 0.1%, to 3,947.

  • The Nasdaq Composite
    declined 47points, or 0.4%, to 11,740.

For the week, the Dow is heading for a 0.7% rise, while the S&P 500 was on track to gain 0.8% and the Nasdaq was on pace to advance 0.9%, according to FactSet data, at last check.

What’s driving markets

U.S. stocks were down slightly Friday afternoon but still on track for weekly gains as worries over the banking system lingered.

Bank concerns have cast a “heavy cloud over the market,” with investors worried about “weak links,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, in a phone interview. Ma said he expects investors will be looking to sell, potentially into any rallies, “until some of these clouds are lifted.”

Shares of Germany’s Deutsche Bank AG

dropped Friday, after the cost of insuring the bank against a credit default jumped. The bank’s credit-default swaps rose to the highest level since late 2018, according to a Reuters report Friday.

As banking concerns weighed on stocks, Treasury Secretary Janet Yellen announced Friday she would call an unscheduled meeting of the Financial Stability Oversight Council, or FSOC, which was created in the wake of the 2008 financial crisis to help the government combat threats to financial stability.

“Clearly, somebody thinks there are some concerns there,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. The problems facing European banks stem back to the era of negative interest rates, which set banks up for large losses on their bond holdings, he said.

The selloff in DB shares weighed on banks in the U.S. and Europe, as well as the broader market as banking-sector fears reemerged. Shares of UBS Group
which recently agreed to buy rival Credit Suisse Group, traded lower.

Other major European lenders, including Italy’s UniCredit S.p.A
and Spain’s Banco Santander SA
also saw their shares sink.

“The thing that’s important to know about financials is there probably are banks that have problems, but there are others that don’t,” Frederick told MarketWatch during a phone interview. “People need to do some research.”

Financials were the second-worst performing sector on the S&P 500, with only consumer-discretionary stocks faring worse on Friday.

While the banking-sector drama has hammered the financial sector, the outperformance of megacap technology stocks and other sectors has helped to limit losses for U.S. stocks. The S&P 500 is down by just 0.6% so far this month, according to FactSet data, at last check.

Concerns about the fragility of the banking sector have been percolating following a year of the Federal Reserve’s aggressive interest rate hikes. On Wednesday, the Fed announced that it hiked its policy rate by a quarter point to a range of 4.75% to 5% while projecting it could deliver one more 25 basis-point hike in 2023.

In his first comments since the rapid collapse of Silicon Valley Bank two weeks ago, St. Louis Federal Reserve President James Bullard said the latest drop in Treasury yields could help cushion some of the stress facing the banking sector.

Treasury yields continued to decline on Friday, with the spread between the 2-year Treasury note yield
and the 10-year note
narrowing to about 40 basis points, from 100 basis points just a few weeks ago.

Read: ‘Red alert recession signals.’ Gundlach expects the Fed to cut rates substantially ‘soon.’

In U.S. economic data released Friday, a report on sales of durable goods in the U.S. showed orders fell 1% in February, largely because of waning demand for passenger planes and new cars. Meanwhile, the S&P Global Flash U.S. services-sector index rose to an 11-month high of 53.8 from 50.5 in the prior month.

Matthew J. Maley, chief market strategist at Miller Tabak + Co., said investors should probably be less concerned about the banks, and more concerned about what a recession might do to corporate earnings.

“Don’t get us wrong, if we’re headed for another major banking crisis, the markets will get hit even harder,” Maley said in emailed commentary. “However, even if the situation with the global banks calms down, the stock market is still headed much lower.”

See: Deutsche Bank drops, weighing on banking stocks and Scholastic tumbles on disappointing results

–Steve Goldstein contributed to this report.

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