U.S. stocks end higher, S&P 500 books back-to-back weekly gains despite bank jitters spurred by Deutsche Bank

What drove markets

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,
-8.53%

DB,
-3.11%
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,
-0.94%,
which recently agreed to buy rival Credit Suisse Group, fell Friday.

Other major European lenders, including Italy’s UniCredit S.p.A
UCG,
-4.06%
and Spain’s Banco Santander SA
SAN,
-3.00%,
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,
3.779%
and 10-year Treasury note
TMUBMUSD10Y,
3.376%
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.

Companies in focus

• Deutsche Bank
  DBK,
  -8.53%

  DB,
  -3.11%
  shares dropped 8.5% but finished off lows seen when the German bank’s credit default swaps jumped without an apparent catalyst.

• Wells Fargo
  WFC,
  -1.04%
  shares slid 1% while JPMorgan
  JPM,
  -1.52%
  fell 1.5%, with bank stocks remaining under pressure in the wake of regional U.S. bank failures.

• Activision Blizzard
  ATVI,
  +5.91%
  climbed 5.9% and after the U.K. Competition and Markets Authority dropped some of its concerns with the potential purchase of the company by Microsoft. Shares of Microsoft
  MSFT,
  +1.05%
  rose slightly more than 1%.

–Steve Goldstein contributed to this report.