Markets: News  

By Vivien Lou Chen and William Watts

U.S. stocks rallied to finish near session highs on Monday, as investors appeared becalmed by the latest efforts to stave off a potential global banking crisis ahead of this week's Federal Reserve interest-rate decision.

What happened

The S&P 500 and Nasdaq Composite had both gained ground last week despite the continued banking upheaval, while the Dow suffered a second straight weekly loss on Friday.

What drove markets

UBS Group's (UBS) emergency purchase of its beleaguered Swiss peer Credit Suisse (CSGN.EB), a deal that came at the prompting of local regulators and was announced late Sunday, was a bid to stave off a further deterioration in confidence in the global banking system.

"Some of the news over the weekend cleared the deck of concerns over Credit Suisse falling into an abyss or having to be rescued by the government," said James Demmert, chief investment officer at Main Street Research, a New York City-based firm with $2 billion in assets under management.

And while upheaval in the banking sector isn't welcome, it is a sign that the Fed's monetary policy efforts are starting to tighten financial conditions, which could be an important turning point in the battle to bring down inflation, Demmert told MarketWatch in a phone interview.

The Fed, meanwhile, faces a dilemma at its policy meeting on Tuesday and Wednesday as it tries to balance its inflation fight against worries over the stability of the financial system.

Read: The Fed will either pause or hike interest rates by 25 basis points. What are the pros and cons of each approach?

Fed-funds futures traders, who earlier this month had braced for a rate hike of 50 basis points, or half a percentage point, now see a 26.9% chance that policy makers will leave rates unchanged on Wednesday and a 73.1% chance of a 25-basis-point, or quarter-point, increase.

See:Traders see growing chance of Fed rate hike in May, pause or cuts thereafter

"The Fed is between a rock and hard place when it comes to trying to bring down inflation by hiking rates and not putting undue pressure on the banking system," Gennadiy Goldberg, senior U.S. rates strategist at TD Securities, said by phone. "I think they try to break both into two separate categories, by gradually hiking rates while offering support to the banking system through its new lending program."

Also read: What's at stake for stocks, bonds as Federal Reserve weighs bank chaos against inflation fight

Shares of First Republic Bank(FRC) finished down by another 47% on Monday after the troubled bank had its credit rating slashed deeper into junk territory over the weekend. S&P Global Ratings said that last week's $30 billion rescue package doesn't solve the bank's "substantial business, liquidity, funding and profitability challenges." First Republic shares have fallen 90% this year.

But other regional banks were holding their own, with the S&P Regional Banking exchange-traded fund (KRE) up 1.2%. The ETF remains down around 27% for the month.

The dollar, which often rallies at times of global market anxiety, was softer versus some of its major rivals, reflecting the drop in short-term Treasury yields before Monday as traders increased bets that the Fed would have to leave interest rates unchanged after Wednesday. The ICE U.S. dollar index , a measure of the currency against a basket of six major rivals, was off 0.4%.

Companies in focus

-- Jamie Chisholm contributed to this article.

-Vivien Lou Chen

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March 20, 2023 16:30 ET (20:30 GMT)

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