Bruised Banks Fuel Short-Covering Rally in Stocks: Markets Wrap

(Bloomberg) — The chaotic week for financial markets ended with a rally in risk assets — possibly driven by short-covering — as regional banks rebounded from a brutal rout and solid jobs data tempered fears of a recession. Treasuries fell.

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A rally in equities halted the S&P 500’s longest losing streak since February. PacWest Bancorp soared over 80%, following a rout that saw its shares tumbling to a record low. Western Alliance Bancorp and First Horizon Corp., which were also strongly hit this week, jumped. The KBW Bank Index of financial heavyweights rebounded from its lowest since September 2020.

Wall Street’s favorite volatility gauge, the VIX, snapped a four-day surge to hover near 17. Strong earnings at Apple Inc. helped lift the megacap tech space, with the world’s most-valuable company climbing almost 5%.

US hiring and workers’ pay gains accelerated in April, showing signs of labor-market resilience and inflationary pressures in the face of headwinds.

“For now, this report is another sign that the Fed hasn’t broken the economy yet,” said Callie Cox, a US investment analyst at eToro. “The bears’ best argument is that a recession is around the corner, but it may be hard to make that argument until we see actual evidence in jobs data.”

Another key aspect of the data is the fact that the strong figures also increase chances the Federal Reserve will hold rates higher for longer, and potentially keep the door open to an 11th straight hike in June.

Fedspeak

Fed Bank of St Louis President James Bullard said policymakers will probably have to push rates higher to cool inflation, but added he would wait and see what the data show before deciding what move to support in June. Bullard also said he thinks the central bank can still achieve a soft landing, with inflation returning to the target without triggering a significant downturn.

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Rates on swap contracts linked to Fed meetings — which on Thursday briefly priced in a cut in July — moved higher, to levels consistent with a stable policy rate until September — followed by at least two quarter-point cuts by year-end. Treasury two-year yields climbed as much as 15 basis points to 3.94%.

“If the Fed was expecting definitive confirmation it’s time to pause, this is not that signal,” said Ronald Temple, chief market strategist at Lazard. “All said, 500 bps of rate hikes are having an impact, but it’s too early to declare victory over inflation.”

In fact, while inflation has shown some signs of moderation, it’s still well above the central bank’s 2% target. The core consumer price index, which excludes food and energy and is closely watched by the Fed, is projected to show a 5.5% increase in April from a year ago. The report is due Wednesday.

Bank of America Corp.’s Michael Hartnett — who correctly predicted the equity exodus last year — said that a “new structural bull market requires big Fed easing,” which in turn needs a “big recession.”

Resilience in the labor market and price pressures that remain sticky, however, are likely to prevent the Fed from pivoting to cut rates. The strategist reiterated a call to “sell the last rate hike” in the note dated May 4, before the jobs report came out.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.9% as of 4 p.m. New York time

• The Nasdaq 100 rose 2.1%

• The Dow Jones Industrial Average rose 1.6%

• The MSCI World index rose 1.5%

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%

• The euro was little changed at $1.1018

• The British pound rose 0.5% to $1.2635

• The Japanese yen fell 0.4% to 134.85 per dollar

Cryptocurrencies

• Bitcoin rose 2.4% to $29,585.59

• Ether rose 6% to $1,991.7

Bonds

• The yield on 10-year Treasuries advanced five basis points to 3.43%

• Germany’s 10-year yield advanced 10 basis points to 2.29%

• Britain’s 10-year yield advanced 13 basis points to 3.78%

Commodities

• West Texas Intermediate crude rose 4.1% to $71.36 a barrel

• Gold futures fell 1.5% to $2,025.80 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Carly Wanna, Peyton Forte and Ksenia Galouchko.

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