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Bank fears will likely lead to even more market volatility in the week ahead

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Market turbulence could reign supreme once again in the week ahead, as investors worry about the potential for more trouble rippling through the banking system. There are a few economic reports worth monitoring, including Friday’s consumer sentiment and personal consumption expenditures. PCE includes an important inflation reading watched closely by Federal Reserve officials. Fed speakers are back on the circuit after last Wednesday’s interest rate hike. Of note should be Fed Vice Chair for supervision Michael Barr, who speaks on bank oversight before the Senate Banking Committee on Tuesday and the House Finance Committee on Wednesday. It was another choppy week on Wall Street, and the S & P 500 was clinging onto a slight weekly gain as of Friday afternoon. Shares of major banks and some regionals were weaker on the day, as investors worried anew about global contagion, as well as more issues, with U.S. regional banks. For the week, the worst sectors were utilities and consumer discretionary stocks. Financials were flat on the week as of Friday afternoon. The broader market was initially under pressure Friday as investors became jittery about Deutsche Bank . The German bank’s credit default swaps have snapped higher — meaning the cost of insuring its debt against default rose. German Chancellor Olaf Scholz defended the bank, saying it was profitable. I ts shares were lower Friday but off the lows after the close of European trading. The U.S. major averages regained their footing later in the day, with the Dow and S & P 500 on track for slight gains. KRE 1Y line banks “We’re in that place, reminiscent of Fridays past, where we have to be concerned about what other shoes could drop,” said Art Hogan, chief market strategist at B. Riley Financial. “But, there’s symmetric risk that we could get as much good news as bad news.” Hogan said there could be a resolution of the sale of the failed Silicon Valley Bank — which would be a positive — but the market is concerned other potential failures are lurking and that investors were cautious ahead of the weekend. Marc Chandler, chief market strategist at Bannockburn Global Forex, said the banking troubles overshadow most everything else in markets. Fed funds futures are pointing to a full percentage point in interest rate cuts this year alone, even though Chairman Jerome Powell stressed the Fed was not considering a rate cut. “The market is saying: ‘You, the Fed, do not appreciate the slowdown that is going to hit us,'” Chandler said. He said even upcoming inflation data is not as important as it had been. “The PCE deflator is going to be sticky, and there’s a chance the core might tick up,” he said. “I think the market sees this as a lagging indicator. I think the tightening of financial conditions is going to lower inflation.” Lower inflation would mean less Fed tightening, which the futures market is predicting. The Fed raised interest rates by a quarter-point Wednesday and signaled in its forecast that it could raise one more time. Powell, during his press briefing, acknowledged that the banking sector’s problems are restricting bank lending and could impact the economy. Some economists expect the tighter credit conditons could restrict capital to businesses and individuals, speeding the arrival of a recession. “Everything before the first week in March seems to be old news,” Chandler said, noting the failure of Silicon Valley and Signature Bank changed perceptions. “A couple of months ago, we were thinking what could break?” he said. “Once again, it’s the … financial sector that is stopping central banks.” Where do stocks go from here? Even with concerns about the financial system, the S & P 500 is still positive for the year, up more than 2%. Stock strategists have been divided on whether the worst is over for stocks — and the economy. “I think October was the bottom, and now we have a black swan credit event happening, and the stock market had some losses. But, I think that was the bulk of the decline,” said Tom Lee, head of research at Fundstrat. “I think the reason we didn’t fall more is people are not really long equity. There’s more cash on the sidelines than there was in May, 2020.” Lee said investors are finding safety in Big Tech, such as Apple and Microsoft . The New York Stock Exchange’s FANG+ index was also up about 32% year to date. .SPX 1Y line y “I think the industrials are going to benefit too. I think the Fed is done hiking, and I think the path of rates has actually turned,” Lee said. “That’s going to allow the PMIs to bottom. When the PMIs bottom, that’s when industrials really start to work.” Lee said those big cap tech names will not work if the economy heads into a recession, but he expects the worst might be over. “The market is going to do a lot better and it held onto its gains despite all the things that rocked the market. I think we’re at 4,700 (on the S & P 500) before the end of the year,” he said. But Evercore ISI’s Julian Emanuel expects the S & P 500 could break the October low and that the economy could sink into a recession. “There’s never been a bear market bottom before a recession started in 60 years,” he said. “We have been expecting a recession to begin in the second half of 2023 for some time. You have to ask yourself over the events of the last two weeks, is this more or less likely?” Emanuel said he expects health care and consumer staples, which have lagged, to start to do better and return to their safe haven status. “‘FANG’ has been holding the whole market up. At some point you o back to the idea that on balance the public owns too much FANG,” he said. FANG is an acronym used for megacap tech names Facebook-parent Meta, Amazon, Netflix and Google-parent Alphabet. Treasury yields continued to slide. The 2-year Treasury yield, above 4% before the Fed rate hike, briefly slid below 3.7%. It traded at 3.77% on Friday afternoon. US2Y 1Y line 2y “It came blasting down. The 2-year has been so volatile. It’s been crazy,” said Michael Schumacher, head of macro strategy at Wells Fargo. The 2-year closely reflects Fed policy. “We think the market is pricing too much Fed easing for the next year,” said Schumacher. He added that market concern about banks has risen. “The probability in the market for a bad event has gone up. … That makes sense, but we think it’s gotten carried away.” Week ahead calendar Monday Earnings: Carnival 5 p.m. Fed Governor Philip Jefferson Tuesday Earnings: Walgreen Boots Alliance, McCormick, Micron 8:30 a.m. Advance economic indicators 9 a.m. S & P/Case-Shiller HPI 9 a.m. FHFA home prices 10 a.m. Fed Vice Chair for Supervision Michael Barr at Senate Banking Committee on bank oversight Wednesday 10 a.m. Pending home sales Thursday Earnings: BlackBerry 8:30 a.m. Initial claims 8:30 a.m. Real GDP Q4 10 a.m. Fed Vice Chair Barr at House Financial Services Committee on bank oversight Friday 8:30 a.m. Personal income/spending 9:45 a.m. Chicago PMI 10 a.m. Consumer sentiment 5:45 p.m. Fed Governor Lisa Cook Fed Governor Christopher Waller

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