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Lyft Inc. on Thursday reported first-quarter results that beat expectations, but a forecast that fell just shy of analysts’ estimates weighed on the company’s stock.
Lyft shares LYFT fell 15% after hours. They had dropped 1.8% in the regular session to close at $10.69 after a six-day positive streak.
Lyft forecast second-quarter revenue of…
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HOUSTON—After the measure was fast-tracked through the city council, a new zoning law went into effect this week that requires all developers in Houston to put in 10 additional parking spaces for every parking space. “We’re dedicated to adopting urban planning strategies that ensure our community has access to a sufficient number of parking spaces for every parking space that we pave,” said Mayor Sylvester Turner, cutting the ribbon on a new parking spot as hundreds of pounds of concrete were immediately poured on all sides of him to create the legally mandated supplementary spaces. “Previously, we only allotted five parking spaces per space, and that has proven inadequate. For too long we’ve stood by and watched as historic parts of our beautiful city stood in the way of more and more parking spaces. Meanwhile, we have fewer than a dozen spots for every man, woman, and child in Houston. That is simply unacceptable.” At press time, a second law was passed requiring that 10 parking garages be built for every square inch of green space in the city.
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For anyone watching Netflix, the streaming services’ recent moves to cut costs could mean fewer films, lower-budget shows and — depending on your subscription — more ads. For anyone buying a Tesla, its moves to cut prices will make it easier on customers, but harder on profit-seeking investors.
With both companies reporting results this week, Wall Street will get a look at who still wants a Tesla, amid growing competition, and what kind of growth and viewership anyone can expect from Netflix, as it recalibrates its streaming ambitions and focuses more on profitability following years of rapid growth.
Netflix Inc.
NFLX,
which reports first-quarter results on Tuesday, is trying to crack down on shared accounts, and analysts polled by FactSet see subscriptions coming in well below the average. However, BofA analyst Jessica Reif Ehrlich said that first-quarter results would likely “mark the low point” of the year, “reflecting the initial impact of password sharing efforts in select markets.”
Netflix will report as shareholders’ growing influence over the streaming universe raises questions over what shows and films get streamed, and for how long, as Wall Street tries to wring more bottom-line gains from an industry that boomed before and during the pandemic but burned cash and got crowded in the process. Netflix, along with Walt Disney Co.
DIS,
have laid off employees, while Warner Brothers Discovery Inc.
WBD,
fuses its streaming holdings together.
“We expect Netflix to continue reining in spending, particularly by seeking alternatives to its past practices,” Wedbush analysts Alicia Reese and Michael Pachter wrote in a research note on Thursday. “The company appears to us to be producing fewer feature length films, which we have always viewed as a poor investment, and appears focused on lower cost television content.”
“We are equally encouraged that Netflix is looking at low-cost content like workout videos, which we believe will present a lot of value to subscribers at very low cost,” they added later.
The analysts said that they felt Netflix was well positioned, as other streamers rethink their approach to expansion and financials. And they said Netflix “should be valued as an immensely profitable, slow-growth company.” They also said that Netflix’s decision to launch a cheaper ad-supported option was a “great decision” after growth stalled in the U.S. and Canada and the company’s business in Europe, the Middle East and Africa reaches the saturation point.
For Tesla Inc.
TSLA,
which reports results on Wednesday, the focus for investors will be on price-cutting and its impact on margins. Still, Potter, an analyst at Piper Sandler, has said Tesla is on a “warpath” and “maintaining its aggressive approach to pricing,” and said investors “should expect relentless price cuts to continue.”
Base prices for Tesla’s Model S and Model X have fallen by around $5,000, MarketWatch has noted, as the electric-vehicle maker tries to stimulate demand. The company is also selling a more affordable Model Y SUV.
“Tesla concerns on pricing and a race to the bottom persisted as general sentiment on the stock is souring given recent price cuts after a brief period of stabilization,” TD Cowen analyst Jeffrey Osborne said in a note.
Tesla will report as the Biden administration tries to take a harder stance on auto pollution. The EPA recently proposed new emissions restrictions intended to hasten electric-vehicle usage, by incrementally curtailing tailpipe emissions each year for vehicle model years 2027 through 2032. However, some analysts said the measures would push prices higher for regular and electric vehicles.
The first-quarter earnings reporting season will pick up steam in the week ahead, with 60 S&P 500 companies, including six from the Dow Jones Industrial Average
DJIA,
reporting quarterly results, according to FactSet. Those companies will report as Wall Street analysts remain pessimistic about results for the quarter, and the prospect of another so-called “earnings recession” in which profits contract for at least two straight quarters.
“As of today, the S&P 500 is reporting a year-over-year decline in earnings of -6.5% for the first quarter, which would mark the largest earnings decline reported by the index since Q2 2020 (-31.6%) and the second straight quarter the index has reported a decline in earnings,” FactSet Senior Earnings Analyst John Butters said in a report on Friday.
After investors cheered JPMorgan Chase & Co.’s
JPM,
quarterly results on Friday — despite Silicon Valley Bank’s collapse and broader recession anxieties — other banking giants, like Bank of America Corp.
BAC,
Goldman Sachs Group Inc.
GS,
and Morgan Stanley
MS,
report during the week ahead. So does Johnson & Johnson
JNJ,
after it agreed to pay as much as $8.9 billion to settle scores of lawsuits alleging that its talc baby powder was linked to cancer. Charles Schwab Corp.
SCHW,
United Airlines Holdings Inc.
UAL,
and AT&T Inc.
T,
also report during the week.
Supply-chain update, anyone? Shipping rates have fallen. Labor tensions have risen. Railroad safety is under scrutiny. Elsewhere in that industry, hedge funders are applying pressure. Memories of 2021’s supply-chain meltdown are still fresh after it led to shipping delays and put the low-work labor that fuels much of that distribution network under a spotlight.
At any rate, trucking and logistics company J.B. Hunt Transportation Services Inc.
JBHT,
reports on Monday, while railroad giant CSX Corp.
CSX,
reports on Thursday. Both companies report after a drop-off in demand for goods last year, as inflation remolded consumers’ buying habits. They also report after rail workers threatened to strike over what they said were inadequate sick-time policies. More recently, a group representing the terminal operators at the ports of Los Angeles and Long Beach alleged that dockworkers were disrupting daily operations at the two massive import gateways, as the workers’ union and the terminal operators try to work out a contract. The quarterly financial reports and earnings calls will offer a look at what the year ahead has in store.
Credit-card transactions, charge-offs: Credit-card providers Discover Financial Services
DFS,
and American Express Co.
AXP,
report Wednesday and Thursday, respectively. The companies will report after Discover took a hit in January after it forecast credit-card net charge-offs — a measure of debt a company doesn’t think it’ll get back — that were worse than what Wall Street expected. Similar to the results from the big banks, the results from American Express and Discover will tells us how much consumers are still spending, and whether more are falling behind on their bills, as recession anxieties prevail.
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The Justice Department and the Environmental Protection Agency have filed a complaint against Norfolk Southern Corp. for unlawful discharge of pollutants and hazardous substances in the Feb. 3 train derailment in East Palestine, Ohio.
The complaint seeks penalties and injunctive relief for the unlawful discharge of pollutants, oil and hazardous substances under the Clean Water Act, according to statements released by the Justice Department and the EPA. The Justice Department and EPA are also seeking a declaratory judgment on liability for past and future costs under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).
Norfolk Southern’s
NSC,
stock has fallen 16.8% since the derailment near the Ohio-Pennsylvania border. The stock is up 0.3% Friday.
Related: Norfolk Southern will do ‘everything it takes’ for East Palestine, CEO tells senators
“When a Norfolk Southern train derailed last month in East Palestine, Ohio, it released toxins into the air, soil, and water, endangering the health and safety of people in surrounding communities,” Attorney General Merrick Garland said in a statement. “With this complaint, the Justice Department and the EPA are acting to pursue justice for the residents of East Palestine and ensure that Norfolk Southern carries the financial burden for the harm it has caused and continues to inflict on the community.”
In a separate statement, EPA Administrator Michael Regan said: “No community should have to go through what East Palestine residents have faced. With today’s action, we are once more delivering on our commitment to ensure Norfolk Southern cleans up the mess they made and pays for the damage they have inflicted as we work to ensure this community can feel safe at home again.”
Norfolk Southern has created a website, nsmakingitright.com, to track its progress in cleaning up the site.
“Our job right now is to make progress every day cleaning up the site, assisting residents whose lives were impacted by the derailment, and investing in the future of East Palestine and the surrounding areas,” a spokesperson for Norfolk Southern told MarketWatch. “We are working with urgency, at the direction of the U.S. EPA, and making daily progress. That remains our focus and we’ll keep working until we make it right.”
Related: Norfolk Southern sued by Ohio over ‘entirely avoidable’ East Palestine derailment
More than 9.4 million gallons of affected water have been recovered and transported off-site for final disposal, according to Norfolk Southern, along with 12,904 tons of waste soil that has been removed for proper disposal.
The company has also flushed 5,200 feet of affected waterways and sampled more than 275 private drinking water wells, according to nsmakingitright.com.
The suit from the Justice Department and the EPA comes just two weeks after Ohio Attorney General Dave Yost filed a 58-count civil lawsuit against Norfolk Southern over the derailment in East Palestine.
Now read: Here are the chemicals spilled near Philly as U.S. drinking-water safety is top of mind
No one was killed or injured in the Ohio derailment, but the incident has been described as a “PR nightmare” for Norfolk Southern and the rail industry. The derailed cars included 11 tank cars carrying hazardous materials that subsequently ignited, damaging an additional 12 railcars, according to the National Transportation Safety Board, and setting off concerns about the impact on air and water quality and dangers to health in the region.
Earlier this month, Norfolk Southern CEO Alan Shaw was grilled by senators when he provided testimony on the disaster before the Senate Committee on Environment and Public Works.
While safety was the primary focus of the hearing, Shaw was also pressed on Norfolk Southern’s stock buybacks and the company’s use of precision scheduled railroading, which focuses on the movement of individual train cars rather than whole trains.
Related: Train derailment in Minnesota thrusts rail safety back into the spotlight
In his testimony, Shaw vowed to do “everything it takes” for the community affected by the derailment.
Rail safety was thrust into the spotlight again this week with the derailment of a BNSF train carrying ethanol and corn syrup in Minnesota early Thursday.
Everstream Analytics, a supply-chain analytics company, has been researching train derailments involving Class I rail carriers between 2018 and 2023. A Class I carrier is defined as any carrier earning annual revenue greater than $943.9 million, according to the U.S. government’s Surface Transportation Board. Data show that derailments across rail companies increased considerably in the U.S. between 2021 and 2022, according to Everstream Analytics.
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Lyft Inc.’s incoming Chief Executive David Risher looks at the ride-hailing company’s competition with Uber Technologies Inc. as a way to keep both companies “honest and focused,” he said in an interview with MarketWatch on Monday.
“There’s lots of two-service dynamics, or market dynamics, like Coke and Pepsi, or the Nasdaq and the [New York Stock Exchange],” Risher said. “You want that level of competition.”
Lyft
LYFT,
which has lost $2.2 billion, or about a third, of its market capitalization since it reported earnings last month, announced Monday that board director Risher will take over as CEO of the struggling company. He will replace company co-founder Logan Green, who will become chairman of the board.
Lyft is competing with much larger rival Uber
UBER,
which has gained ride-hailing market share in recent years at the expense of Lyft, according to YipitData, which says Uber now has about 74% of U.S. market share vs. Lyft’s 26%. Risher declined to say much about how he would differentiate himself from the outgoing CEO, but he indicated that Lyft will not attempt to compete with Uber in other services, such as delivery.
“I don’t want to get in a car with someone that’s just delivered a pizza,” he said.
“At some point, I don’t think of this as just an Uber battle,” he said. “It’s a battle against staying at home. How do we get people out? How do we get them playing and working together?”
Lyft’s new top executive was for the past 13 years CEO of Worldreader, a nonprofit that focuses on children’s literacy through digital reading. Risher said because of that, he’s familiar with “doing more with less… you have to be more efficient.”
Risher will receive a signing bonus of $3.25 million and have an annual salary of $725,000, according to Lyft’s filing with the Securities and Exchange Commission on Monday. He confirmed to MarketWatch that he intends to donate $3 million of that signing bonus to Worldreader.
“I told the board it’s very important to me that Worldreader become stronger instead of becoming weaker,” Risher said.
Risher is also active in efforts to encourage wealthy philanthropists to give away their money faster. He and his wife, Jennifer Risher, launched a group called Half My DAF in 2020 that aims to move money out of donor-advised funds and into the hands of working charities more quickly.
“My wife and I do that on the side,” Risher said. “For a long time, I’ve been a purpose-driven leader. But Lyft is my No. 1 focus.”
Before leading Worldreader, Risher was an early employee of Amazon.com Inc.
AMZN,
becoming its first head of product and head of U.S. retail, as well as a general manager at Microsoft Corp.
MSFT,
He said that experience gives him an “understanding of competition.”
He said Lyft will compete by focusing on customers and drivers, such as making sure drivers are picking up customers on time. He said there won’t be much difference in the company’s stance on treating drivers as independent contractors when he takes over.
Lyft, like Uber, has been under pressure from investors to become profitable. The way to get there is through making sure to address it from both the “cost side and the volume side,” Risher said.
Risher officially takes the helm on April 17. Like Green, co-founder and President John Zimmer also will relinquish a role in day-to-day operations, but will continue as vice chair of the board.
MarketWatch staff writer Leslie Albrecht contributed to this article.
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Lyft Inc. is bringing in a new chief executive and removing its co-founders from running the ride-hailing company on a day-to-day basis, sending shares more than 3% higher in after-hours trading Monday.
Lyft
LYFT,
announced after markets closed Monday that board member David Risher will take over as CEO, replacing co-founder Logan Green. Green and Lyft’s other active co-founder — John Zimmer, who had been serving as president — will remain on the company’s board as chair and vice chair respectively, but not actively participate in running the company.
“I’m honored and humbled that Logan, John, and the board have trusted me to lead Lyft,” Risher said in a letter to employees. “And I’ll start by saying this: I want Lyft to lead, and I’m thrilled to lead Lyft.”
Risher worked at Microsoft Corp.
MSFT,
in the 1990s before becoming employee No. 37 at Amazon.com Inc.
AMZN,
according to Lyft’s announcement, which noted that he received a permanent thank you on the Amazon website from founder and former chief executive Jeff Bezos upon his departure in 2002. For the past 13 years, he has been in charge of a nonprofit focused on childhood literacy called Worldreader.
“Across all three organizations, I learned of the power of leading with purpose,” he wrote to employees. “Each organization derived tremendous energy through a singleness of purpose. It’s what attracted and retained great people, allowed us to make focused decisions and inspired our customers.”
In an interview with The Wall Street Journal, Risher — who has been on Lyft’s board since 2021 — admitted that Lyft faces competitive issues, seemingly referencing Uber Technologies Inc.
UBER,
He mentioned “a very aggressive — very aggressive — competitor,” while adding, “I think being a strong No. 2 is a good place to be.”
Lyft shares lost more than a third of their value in a single session in February after Green and Zimmer provided a forecast that missed expectations in what one analyst called “a debacle for the ages.” Monday’s announcement reiterated Lyft’s first-quarter guidance and said Lyft expects to report quarterly results in early May.
D.A. Davidson analyst Tom White told MarketWatch on Monday afternoon that the change at the top could be “a potential model positive.”
“A new leader with broader range of experiences could signal increased willingness to broaden Lyft’s strategic aperture a bit as it relates to other possible adjacent products (delivery?), partners, or ways to create value,” he wrote in an email.
Green and Zimmer began developing the company nearly 15 years ago, and launched the service in 2012, according to their separate letters to employees. They have jointly led the company since, including through a 2019 initial public offering that gave them special shares with stronger voting power.
From 2019: 5 things to know about the Lyft IPO
“To say I have loved leading Lyft is an understatement,” Green wrote in his letter to employees. “To say that I will miss working alongside you and this incredible team every day doesn’t even come close. This was an adventure of a lifetime, and I’ve loved every minute of it — the sweetness of the highs, and the pain of the lows that make you appreciate the next win that much more. I’m eternally grateful to this team.”
Lyft shares sold for $72 in its IPO, and closed Monday at $9.60 before moving closer to $10 in the extended session. Lyft stock has plummeted nearly 75% in the past 12 months, dropping 74.4% as the S&P 500 index
SPX,
has declined 12.6%.
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Judging by the major indexes, it will take more than the Federal Reserve raising interest rates in the midst of the worst banking mess since the 2008 financial crisis for stock-market investors to lose their cool.
“Investors are broadly assuming that regulators are going to step in and ringfence the sector if need be, and that’s what keeps it from spilling over to the broader market,” said Anastasia Amoroso, chief investment strategist at iCapital, in a phone interview.
There’s also a second reason. Investors see the banking woes forcing the Fed to pause the rate-hike cycle or even begin cutting as early as June, she noted. An end to the yearlong rise in rates will remove a source of pressure on stock-market valuations.
But gains last week, which came amid volatile trading, aren’t sending an all-clear signal, stock-market analysts and investors said.
Banking worries haven’t gone away after the failure of three U.S. institutions earlier this month and UBS Group AG’s
UBS,
UBSG,
agreement to acquire troubled Swiss rival Credit Suisse
CS,
CSGN,
in a merger forced by regulators. Jitters were on display Friday when shares of German financial giant Deutsche Bank
DB,
It’s the fear of runs on U.S. regional banks that still keep investors up at night. Markets might face a test Monday if investors react to Federal Reserve data released after Friday’s closing bell showed deposits at small U.S. banks dropped by a record $119 billion in the weekly period ended Wednesday, March 15, following Silicon Valley Bank’s collapse the preceding Friday.
That sensitivity to deposits was on display last week. U.S. Treasury Secretary Janet Yellen was blamed for a late Wednesday selloff that saw the Dow end over 500 points lower after she told lawmakers that her department hadn’t considered or discussed a blanket guarantee for deposits. On Thursday, she told House lawmakers that, “we would be prepared to take additional actions if warranted.”
Deposits are “the epicenter of the crisis of confidence” in U.S. banks, said Kristina Hooper, chief global market strategist at Invesco, in a phone interview. Anything that suggests there won’t be full protection for deposits is bound to worry investors in a charged environment.
See: Is the deposit insurance system broken? 9 things you need to know.
Cascading runs on regional banks would stoke fears of further bank failures and the potential for a full-blown financial crisis, but short of that, pressure on deposits also underline fears the U.S. economy is headed for a credit crunch.
Speaking of a credit crunch. Deposits across banks have been under pressure after the Federal Reserve began aggressively raising interest rates roughly a year ago. Since then, deposits at all domestic banks have fallen by $663 billion, or 3.9%, as money flowed into money-market funds and bonds, noted Paul Ashworth, chief North American economist at Capital Economics, in a Friday note.
“Unless banks are willing to jack up their deposit rates to prevent that flight, they will eventually have to rein in the size of their loan portfolios, with the resulting squeeze on economic activity another reason to expect a recession is coming soon,” he wrote.
Meanwhile, activity in U.S. capital markets has largely dried up since Silicon Valley Bank’s collapse on March 10, noted Torsten Slok, chief global economist at Apollo Global Management, in a recent note.
There was virtually no investment-grade or high-yield debt issuance and no initial public offerings on U.S. exchanges, while merger and acquisition activity since then represents completed deals that were initiated before SVB’s collapse, he said (see chart above).
“The longer capital markets are closed, and the longer funding spreads for banks remain elevated, the more negative the impact will be on the broader economy,” Slok wrote.
The Dow Jones Industrial Average
DJIA,
rose 1.2% last week, ending a back-to-back run of declines. The S&P 500
SPX,
rose 1.4%, recouping the large-cap benchmark’s March losses to turn flat on the month. The Nasdaq Composite
COMP,
saw a 1.7% weekly rise, leaving the tech-heavy index up 3.2% for the month to date.
Regional bank stocks showed some signs of stability, but have yet to begin a meaningful recovery from steep March losses. The SPDR S&P Regional Banking ETF
KRE,
eked out a 0.2% weekly gain but remains down 29.3% in March. KRE’s plunge has taken it back to levels last seen in November 2020.
Look beneath the surface, and the stock market appears “bifurcated,” said Austin Graff, chief investment officer and founder of Opal Capital.
Much of the resilience in the broader market is attributable to gains for megacap technology stocks, which have enjoyed a flight-to-safety role, he said in a phone interview.
The megacap tech-heavy Nasdaq-100
NDX,
was up 6% in March through Friday’s close, according to FactSet, while regional bank shares dragged on the small-cap Russell 2000
RUT,
down 8.5% over the same stretch.
For investors, “the expectation should be for continued volatility because we do have less money flowing through the economy,” Graff said. There’s more pain to be felt in highly levered parts of the economy that weren’t prepared for the speed and scope of the Fed’s aggressive rate increases, including areas like commercial real estate that are also struggling with the work-from-home phenomenon.
Graff has been buying companies in traditionally defensive sectors, such as utilities, consumer staples and healthcare, that are expected to be resilient during economic downturns.
Invesco’s Hooper said it makes sense for tactical allocators to position defensively right now.
“But I think there has to be a recognition that if the banking issues that we’re seeing do appear to be resolved and the Fed has paused, we are likely to see a market regime shift…to a more risk-on environment,” she said. That would favor “overweight” positions in equities, including cyclical and small-cap stocks as well as moving further out on the risk spectrum on fixed income.
The problem, she said, is the well-known difficulty in timing the market.
Amoroso at iCapital said a “barbell” approach would allow investors to “get paid while they wait” by taking advantage of decent yields in cash, short- and long-term Treasurys, corporate bonds and private credit, while at the same time using dollar-cost averaging to take advantage of opportunities where valuations have been reset to the downside.
“It doesn’t feel great for investors, but the reality is that we’re likely trapped in a narrow range for the S&P for a while,” Amoroso said, “until either growth breaks to the downside or inflation breaks to the downside.”
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U.S. stocks finished Friday higher, despite a jump in the cost of Deutsche Bank’s credit-default swaps helping to reignite banking-sector worries. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite each booked weekly gains.
For the week, the Dow gained 1.2%, while the S&P 500 rose 1.4% and the Nasdaq advanced 1.7%, according to FactSet data. The Dow snapped two straight weeks of losses, while the S&P 500 and Nasdaq each booked back-to-back weekly gains.
U.S. stocks ended modestly higher Friday to notch weekly gains even 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 Friday. 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
DBK,
DB,
dropped Friday, after the cost of insuring the bank against a credit default jumped. The bank’s credit-default swaps had risen to the highest level since late 2018, according to a Reuters report Friday.
Treasury Secretary Janet Yellen announced Friday she called 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. The FSOC issued a short statement after the market closed Friday saying that “while some institutions have come under stress, the U.S. banking system remains sound and resilient”.
“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 Deutsche Bank shares weighed on banks in the U.S. and Europe, as banking-sector fears reemerged. Shares of UBS Group
UBS,
which recently agreed to buy rival Credit Suisse Group, fell Friday.
Other major European lenders, including Italy’s UniCredit S.p.A
UCG,
and Spain’s Banco Santander SA
SAN,
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.”
The S&P 500’s financial sector fell 0.1% Friday, according to FactSet data.
While banking-sector woes have hammered the financial sector this month, the outperformance of megacap technology stocks and other sectors have helped prop up the broader U.S. equities market. So far this month, the S&P 500 index is up less than 0.1%, FactSet data show.
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 Friday the latest drop in Treasury yields could help cushion some of the stress facing the banking sector.
Yields on the 2-year Treasury note
TMUBMUSD02Y,
and 10-year Treasury note
TMUBMUSD10Y,
each fell Friday in their third straight week of declines, according to Dow Jones Market Data. Two-year yields slid to 3.777% on Friday, the lowest level since September based on 3 p.m. Eastern time levels, while 10-year Treasury yields dropped to 3.379%, their lowest rate since January.
Read: ‘Red alert recession signals.’ Gundlach expects the Fed to cut rates substantially ‘soon.’
In U.S. economic data, a report Friday on sales of durable goods 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 in March.
The role of regional banks in the U.S. economy is “huge,” said Sandi Bragar, chief client officer at wealth management firm Aspiriant, in a phone interview Friday. Bragar said she worries that recent regional bank failures will result in a pullback in lending that leads to slower economic growth and potentially a recession.
“Our stance has been to be very diversified and we have been remaining on the defensive side of things,” she said.
Within equities, that has meant holding “high-quality companies” that should be resilient in “poor economic times,” including stocks in areas such as healthcare, information technology and consumer staples, said Bragar.
DB,
shares dropped 8.5% but finished off lows seen when the German bank’s credit default swaps jumped without an apparent catalyst.
–Steve Goldstein contributed to this report.
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Deutsche Bank shares slumped on Friday, putting the health of another globally systemic important bank in the spotlight heading into the weekend.
The German lender’s shares
DBK,
fell 10% in Frankfurt trade, and the Euro Stoxx bank index
SX7E,
fell 5%.
Deutsche Bank’s 5-year credit-default swaps widened on Thursday, in what Reuters reported was the largest one-day rise in its history. And on Friday, they widened again.
It should be noted that Deutsche Bank’s 5-year credit-default swap, which was 215 on Friday, is nowhere near the peak for Credit Suisse, which was 1,194, according to S&P Global data. The higher the value of the CDS, the more likely the market sees the issuer defaulting.
Deutsche Bank’s AT1 bonds have tumbled in value after Switzerland wiped out Credit Suisse’s
CSGN,
securities in the deal for it to be taken over by UBS
UBSG,
The Invesco AT1 Capital Bond UCITS ETF
AT1,
which invests in these convertible bonds, has dropped 18% this month as investors lose faith in the securities. European and other banking regulators across the globe have insisted they will not follow Switzerland’s precedent, and first let bank equity fall to zero before wiping out the convertible securities in the event of a failure.
“It is doubtful that banks will be able to issue new AT1 anytime soon, increasing the likelihood of outstanding AT1 notes being extended. We consider that the recent events in the banking sector have resulted in substantially increased uncertainty, which is likely to continue to be reflected as substantial short-term volatility in credit markets,” said analysts at ING.
UBS
UBS,
also is feeling the stress in a deal that the banks say might not complete this year. UBS shares dropped 6%.
Related: Analysts say UBS will face revenue pressure before it can cut Credit Suisse costs.
Analysts also noted that a foreign institution tapped a Fed facility for $60 billion, according to data released by the U.S. central bank on Thursday. The Fed does not identify the counterparties. Major central banks do have access to swap lines for dollar borrowing from the Fed, meaning that either it was an institution that does not have that capability, or it was one that wanted to do so anonymously.
Furthermore, Bloomberg News reported the U.S. government was investigating banks including Credit Suisse and UBS for allegedly helping Russians evade U.S. sanctions.
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Thousands of miles away from U.S. shores last Wednesday, a headline began working its way across Europe, then Wall Street, sparking fresh panic as it dawned on investors that they may be facing yet another banking crisis.
Shares of Credit Suisse
CS,
CSGN,
would eventually sink 25% last week to a fresh record low, unable to find footing days after the head of top shareholder Saudi National Bank said they won’t invest any more in the bank. By Sunday, the struggling Swiss bank had a new owner, leaving investors to wonder if at least one chapter in a current roller coaster of global banking stress can be closed.
Swiss authorities steered rival UBS AG
UBS,
to an all-stock deal worth 3 billion francs ($3.25 billion), or 0.76 francs per share, a not-so-slight discount to the 1.86 franc close on Friday of Credit Suisse. So important was the agreement, it was announced by Switzerland’s President Alain Berset, with both banks and the chairman of the Swiss National Bank on either side of him.
“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” the SNB said in a statement.
The Swiss National Bank said either Swiss bank can borrow up to 100 billion francs in a liquidity assistance loan, and Credit Suisse will get a liquidity assistance loan of up to 100 billion francs, backed by a federal default guarantee. The U.S. Federal Reserve had worked with its Swiss counterpart on the deal as well.
“We welcome the announcements by the Swiss authorities today to support financial stability. The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient,” said a statement Sunday by Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell.
European Central Bank President Christine Lagarde also praised Swiss authorities for “restoring orderly market conditions and ensuring financial stability,” while reiterating the “resilience” of the euro-area banking sector. She said the ECB stands ready to provide liquidity if needed.
Her comment comes days after the the ECB pulled the trigger Thursday on a 50-basis-point rate hike, as it warned “inflation is projected to remain too high for too long.”
The deal for Credit Suisse comes in the wake of stress on the U.S. banking sector, triggered by the collapse of Silvergate Bank, Silicon Valley Bank and Signature Bank, all within the space of a week.
“Virtually everyone at this high-level Swiss press conference — government officials, regulator, central bank governor, and executives of the two banks — blamed the US banking sector turmoil for being the catalyst for the financial turmoil in #Switzerland,” tweeted Mohamed A. El-Erian, chief economic adviser at Allianz, of the press conference Sunday with Swiss authorities to announce the deal.
And for U.S. investors who have had quite enough anxiety lately, a logical question would be to ask if the deal that brings together the two Swiss banking giants will now remove one layer of stress from global markets, and hence Wall Street.
For that reason, many will be watching how Asian and U.S. equity futures trade later on Sunday, as well as Europe’s opening reaction on Monday.
The Credit Suisse news may only go so far to assuage investors, with some raising an eyebrow over Powell and Yellen’s Sunday statement about the Swiss deal. “Seriously, if everyone truly believed the ‘The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient’ … Would they have to tell us? Are these words enough?” said Jim Bianco, president of Bianco Research, on Twitter. “Or do investors want to see Warren Buffett writing checks to regional banks in the next two hours (before Asia opens)?”
Fox News and other media outlets reported over the weekend that the Berkshire Hathaway
BRK.A,
BRK.B,
chairman and CEO had been talking to President Joe Biden’s administration in recent days over possible investments in the battered regional bank sector, and offering his advice.
The billionaire investor was responsible for a capital injection to Bank of America
BAC,
in 2011 as its shares tumbled due to subprime mortgages, as well as $5 billion to Goldman Sachs
GS,
amid the 2008 financial crisis.
Some had said ahead of the deal last week that global-market stability depended on the Swiss first getting their house in order.
“I don’t think there are any direct consequences for U.S. investors, but it’s extremely negative for sentiment if a major Swiss bank fails, hot on the heels of SVB/SBNY,” Simon Ree, the founder of Tao of Trading options academy school and author of the book by the same name, told MarketWatch last week.
“The market will be (temporarily) wondering who’s next. It could start to have the optics of a global banking crisis, rather than an idiosyncratic failure of a niche U.S. regional bank,” said Ree.
Credit Suisse’s troubles came amid a revamp and five straight money-losing quarters, following a painful legacy that included billions worth of exposure to the collapsed Archegos family office and $10 billion worth of funds tied to Greensil Capital it had to freeze.
Read: In its delayed annual report, Credit Suisse admitted to financial control weaknesses
“The SNB and the Swiss government are fully aware that the failure of Credit Suisse or even any losses by deposit holders would destroy Switzerland’s reputation as a financial center,” said Otavio Marenzi, CEO of Opimas, a management consulting firm focused on global capital markets, in a note to clients last week.
The bank’s plummeting stock price and soaring bond yields was “mimicking Silicon Valley Bank’s recent collapse in a frightening way. In terms of the outflow of deposits, Credit Suisse’s position looks even worse,” said Marenzi.
As far as some are concerned, the market may have more stress ahead of it.
“The SVB failure highlights the potential for other skeletons to be hidden in closets and the market will spend the next few weeks/months hunting them out. Even just the extreme volatility we’ve seen on bond markets the last five days renders any attempt to ascribe a value to other asset classes redundant,” said Ree.
Plus: Here’s what’s really protecting your bank deposits
His view is shared by many analysts, who in part point to increasing uncertainty around how the Federal Reserve will react going forward as it tries to balance market and economic risks. Some now see full percentage rate cuts by year-end, amid banking stress.
Samantha LaDuc, the founder of LaDucTrading.com who specializes in timing major market inflections, said she stands by her advice (that she shared with MarketWatch in February) that investors are being “paid to wait,” by staying in cash.
Read: Looking for a place for your cash? Grab these 5% CDs while you still can.
“I have been literally recommending and tweeting to clients that we are PAID TO WAIT in T-bills at 5% until [the] bond market can figure out if we have recession or not. All that happened last week pulled forward recession risk,” she told MarketWatch.
Prior to the SVB crisis, she had been recommending clients short reflation trades, such as banks
XLF,
KRE,
energy
XLE,
and metals and mining
XME,
SLX,
and has been saying she sees “unattractive risk-reward for either stocks or bonds.”
Opimas’ Marenzi said the threat to Wall Street from Credit Suisse was simple:
“You mean what do American investors who do not own any non-American stocks and do not own a passport and could not find Switzerland on a map and who think that anyone who speaks any language other than English is a bit weird have to worry about? Not a lot, other than the contagion spreading back into the US banking system and causing a meltdown,” he told MarketWatch.
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U.S. stocks ended sharply lower Friday as investors parsed mixed signals from the February jobs report amid ongoing concerns about contagion in the banking sector from the troubles at Silicon Valley Bank.
For the week, the Dow sank 4.4%, S&P 500 dropped 4.5% and the Nasdaq shed 4.7%, according to Dow Jones Market Data. The Dow booked its worst week since June, the S&P 500 saw its biggest weekly percentage decline since September, and the Nasdaq had its biggest percentage slide since November.
U.S. stocks slumped amid investor concerns about the banking sector after the closure of Silicon Valley Bank by the Federal Deposit Insurance Corp and in the wake of the monthly employment report released Friday.
In a sign of investor anxiety, the CBOE Volatility Index
VIX,
was up Friday afternoon at almost 25, after jumping Thursday, according to FactSet data, last check.
“Bears came out of hibernation this week after waking up to a warning shot from the banking space,” said Adam Turnquist, chief technical strategist for LPL Financial, in emailed comments Friday, pointing to the collapse of Silicon Valley Bank.
Silicon Valley Bank was closed Friday by the California Department of Financial Protection and Innovation. The Federal Deposit Insurance Corp. was appointed receiver, with the bank becoming the first FDIC-backed institution to fail this year.
Read: Bank ETFs fall amid concerns over SVB and ‘crack’ in financial system after rate hikes
The SPDR S&P Regional Banking ETF
KRE,
was down more than 4% Friday afternoon, FactSet data show, while shares of Bank of America Corp.
BAC,
closed 0.9% lower, Citigroup Inc.
C,
slid 0.5% and JPMorgan Chase & Co.
JPM,
rose 2.5%.
Worries over the banking sector are “probably overshadowing” the positive aspects of the employment report, said Karim El Nokali, investment strategist at Schroders, in a phone interview Friday.
The U.S. employment report for February showed the labor market continued to grow at a robust pace last month, with the U.S. economy adding 311,000 jobs, more than the 225,000 that economists polled by the Wall Street Journal had expected.
But “if you dig a little deeper” into the report, average hourly earnings came in “a little lighter than expected” while labor-force participation ticked up, which are positive developments from an inflation standpoint, said El Nokali.
Average hourly wages grew by 0.2%, a slower rate than the 0.3% rate economists had expected. It was also less than the 0.3% increase in January. The unemployment rate ticked higher to 3.6%, helped by an increase in the labor-force participation rate.
“On the margin,” said El Nokali, the employment report was “positive for the equity market.” He said it would “probably argue more” for the Federal Reserve to raise its benchmark rate by 25 basis points at its policy meeting later this month, as opposed to a 50-basis-point hike that investors had been fearing leading up to the employment data.
See: Jobs report shows strong 311,000 gain in February, puts pressure on Fed for bigger rate hike
Fed Chair Jerome Powell said earlier this week that the “totality” of jobs and inflation data would determine whether the central bank would go back to raising its policy interest rate by another 50 basis points at its meeting later in March.
After climbing earlier in the week, odds of a 50-basis-point rate hike by the Fed have moderated over the past 24 hours. Traders now see a 62% chance of the central bank raising its benchmark rate by 25 basis points, according to the CME FedWatch Tool.
Meanwhile, Treasury yields sank Friday.
The yield on the 2-year Treasury note
TMUBMUSD02Y,
dropped 31.4 basis points to 4.586%, while the 10-year Treasury yields fell 22.8 basis points to 3.694%, according to Dow Jones Market Data. The Treasury yield curve remains massively inverted, which has contributed to banks’ woes.
—Steve Goldstein contributed to this report.
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China has announced new rules on overseas IPOs, potentially sparking the resumption of Chinese companies listing in New York.
Under the new rules, the China Securities Regulatory Commission (CSRC) will vet any overseas listing applications, effective from March 31. The regulator has the power to block such IPOs, and the rules make clear listings must not endanger national security.
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U.S. stocks closed higher Tuesday, but off the session’s best levels, after more data suggested inflation may be slowing and mega-retailer Walmart offered a rosier annual forecast.
The Dow turned negative earlier in the session after the Associated Press reported that Russian missiles crossed into Poland and killed two people, ratcheting up geopolitical tension given Poland is a NATO country.
On Monday, U.S. stocks finished near session lows after early gains evaporated. The Dow Jones Industrial Average fell 211 points, or 0.6%, while the S&P 500 declined 36 points, or 0.9% and the Nasdaq Composite dropped 226 points, or 2%.
U.S. stocks closed higher Tuesday, after another batch of inflation data showed that whole prices rises were slowing in October for the second straight month.
The Dow’s brief negative turn came after reports that Russian military bombarded Ukraine Tuesday. In the attack, missiles reportedly crossed into Poland, a member of NATO, the Associated Press said, citing a senior U.S. intelligence official.
“Geopolitical concerns obviously are never positive for the market,” said Peter Cardillo, chief market economist at Spartan Capital Securities.
On Tuesday, oil futures settled higher. West Texas Intermediate crude for December delivery rose to $1.05, or 1.2%, reaching $86.92 a barrel.
While markets had started to price in the toll of Russian’s nearly nine-month invasion of Ukraine, it had not priced in an potential escalation of the war, said Kent Engelke, chief economic strategist at Capitol Securities Management.
“Talk about geopolitical angst returning,” Engelke said, later adding, “If there were really missiles shot to Poland and that was really not an accident, wow, that is really increasing the scope of the war.”
A U.S. National Security Council spokesperson said the agency was aware of the news reports out of Poland, but that it cannot confirm the reports or any details at this time.
While international worries clouded the session, there was also encouraging domestic news.
The U.S. producer-price index climbed 8% over the 12 months through October, the Labor Department said Tuesday, easing from September’s revised 8.4% increase. Last week, stocks surged after the October consumer-price index rose more slowly than expected.
See: Wholesale prices rise slowly again and point to softening U.S. inflation
Tuesday’s PPI report helped support the notion that inflation has peaked, at least for now.
“Today, it’s really about the PPI and the market reaction to it,” Steve Sosnick, chief strategist at Interactive Brokers
IBKR,
said in a Tuesday morning interview before the reports of missiles crossing into Poland.
Markets ripped higher last Thursday after October’s consumer-price index showed signs of easing. The same dynamic was playing out Tuesday, but the response now has been “a bit more muted” because it’s an iteration on inflation data that investors already had been starting to see, Sosnick said.
So, is the economy really at peak inflation? It’s too early to say for sure, according to Sosnick. Still, the PPI numbers, paired with last week’s CPI reading “does add evidence to that narrative,” he added.
Walmart’s third quarter earnings also were buoying markets, Sosnick said. The massive retailer’s beat on earnings offers a glimpse at the minds and wallets of many American consumers. For anyone who worries about consumers “getting highly defensive” and not spending, Walmart’s numbers are “counter evidence.”
In other news, the first face-to-face meeting between President Joe Biden and President Xi Jinping helped support stocks listed in China and Hong Kong, as some of the tensions between the world’s two largest economies were seen to be easing.
The upbeat tone from Asia, which included Taiwan Semiconductor Manufacturing Company
TSM,
jumping 7.7% on news Warren Buffett had bought a $5 billion stake, underpinned European bourses, which closed higher for a fourth session in a row.
Analysts increasingly expect stocks to enjoy a positive end to the year. “The near-term picture still looks positive for U.S. benchmark indices and while momentum has reached intra-day overbought levels, this doesn’t imply a selloff has to happen right away,” said Mark Newton, head of technical strategy at Fundstrat.
Philadelphia Federal Reserve President Patrick Harker said Tuesday that he favored a 50 basis-point hike to the Fed’s benchmark rate in December. Atlanta Fed President Raphael Bostic said more rate hikes will be needed, even through there have been “glimmers of hope” on inflation.
Fed Vice Chairman for Supervision Michael Barr said Tuesday that the U.S. economy is likely to slow in coming months, and more workers will lose their jobs, in Senate testimony. The Fed is working with regulators to assess risks tied to cryptocurrency markets, following the collapse of FTX and its associated companies.
In other U.S. economic data, the New York Empire State manufacturing index for November showed a gauge of manufacturing activity in the state rose 13.6 points to 4.5 this month.
The yield on the 10-year Treasury note
TMUBMUSD10Y,
was down 6.7 basis points at 3.798%. Bond yields move inversely to prices.
—Jamie Chisholm contributed reporting to this article
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