Gains in financial shares lifted U.S. stocks, while Treasuries retreated as fears of broader contagion from the banking turmoil eased. Tech shares slumped after last week’s rally.

The S&P 500 rose on Monday, with financial firms in the index up more than 1 per cent. Energy producers also advanced. The tech-heavy Nasdaq 100 ended the session 0.7 per cent lower capping a two-week advance. The two-year Treasury yield headed topped 4 per cent.

A gauge of regional lenders climbed roughly 2.5 per cent as First Citizens BancShares Inc. rallied more than 50 per cent after agreeing to buy SVB Financial Group’s Silicon Valley Bank. First Republic Bank jumped on a Bloomberg report that U.S. authorities are considering expanding an emergency lending facility that would give the lender more time to bolster its balance sheet. 

“The market is being pushed and pulled between banks and tech stocks. As the banks have rebounded a lot of money has come out of tech stocks which have held up the market the past two weeks,” said Joe Gilbert, portfolio manager at Integrity Asset Management. “There is a lot of churning going on under the surface right now. Plus the back up in interest rates puts cold water on the tech trade.” 

The weekend may have brought some relief to the banking sector, but it will continue to be closely watched. A gauge of regional U.S. banks has lost roughly 30 per cent since early February.

“You have a massive tug of war between the fact that people know the fundamental outlook is poor, but a lot of people were already either short or long cash, or just generally positioned away from U.S. equity markets, so you could argue positioning is ripe for a squeeze,” said Huw Roberts, head of analytics at Quant Insight. “The most obvious catalyst to my mind that resolves the tug of war would be a new development in terms of the credit crunch.”

 “While nerves are evident, there’s no doubt that the response so far has prevented the situation from becoming much worse and confidence will gradually improve as long as no other banks fall into difficulties,” Craig Erlam, a senior market strategist at Oanda wrote. “That’s obviously a big if at this point.”

RECESSION RISKS

The yield on the 10-year Treasury rose to around 3.54 per cent while the interest rate-sensitive two-year jumped to 4.02 per cent. Such an inverted yield curve — where the short-term rate is higher than the long-term — continues to signal a downturn ahead. 

Fed Minneapolis President Neel Kashkari warned over the weekend that the strain on the financial sector had the U.S. on the brink of a recession. The usually hawkish Kashkari avoided making a prediction about the central bank’s May meeting.

“Recent bank turmoil gives us increased conviction that a deeper-than-expected recession is going to hit this year,” Chris Senyek of Wolfe Research said. He also sees “blow up” risks rising. “We’re already seeing early signs of deterioration in CRE and Autos, and we believe that widening spreads signal more trouble ahead.”

U.S. stocks have largely been shrugging off recession fears with the S&P 500 and Nasdaq both advancing over the past two weeks. 

JPmorgan’s chief strategist Marko Kolanovic said the first quarter “will likely mark the high point for equities this year,” recommending investors stay defensive in a research note. 

“We view the most vulnerable areas as unprofitable companies that depend on steady flow of equity capital to fund operations and tight carry trades implemented over the last 10 to 20 years,” Kolanovic wrote. 

ESTIMATES TOO HIGH

One of Wall Street’s most prominent bears, Morgan Stanley strategist Michael Wilson was also cautious on stocks, saying earnings estimates and valuations need to come down.

“Given the events of the past few weeks, we think guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes,” Wilson wrote in a note on Monday.

Seema Shah, chief global strategist at Principal Asset Management, told Bloomberg TV that many U.S. stocks were expensive and unappealing ahead of a looming economic slump. 

“If you’re looking outside of the U.S., valuations are still pretty cheap,” she said. “There’s very little to be attractive about this U.S. market at this stage.”

Investors will be closely watching data on the personal consumption expenditures price index, which is the Fed’s preferred measure of underlying price pressure, that will come out later this week for direction on the US central bank’s rate path. On Monday, traders were once again leaning toward a quarter-point rate hike at the Fed’s next meeting. 

 “If they do raise rates again - especially if they say or imply that May isn’t the last one - then we could get a risk off rally again, with defensives outperforming cyclicals,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

Elsewhere, European Central Bank Executive Board member Isabel Schnabel pushed for this month’s decision statement to signal possible interest-rate increases in future, according to people with knowledge of the matter.

In a further indication of risk-on sentiment, oil rose and gold slipped. 

Key events this week:

U.S. wholesale inventories, U.S. Conf. Board consumer confidence, Tuesday
EIA Crude Oil Inventory Report, Wednesday
Eurozone economic confidence, consumer confidence, Thursday
U.S. GDP, initial jobless claims, Thursday
Boston Fed President Susan Collins and Richmond Fed President Thomas Barkin speaks at event. Treasury Secretary Janet Yellen also speaks, Thursday
China PMI, Friday
Eurozone CPI, unemployment, Friday
U.S. consumer income, PCE deflator, University of Michigan consumer sentiment, Friday
ECB President Christine Lagarde speaks, Friday
New York Fed President John Williams speaks, Friday

Some of the main moves in markets:

Stocks

The S&P 500 rose 0.2 per cent as of 4:00 p.m. New York time
The Nasdaq 100 fell 0.7 per cent
The Dow Jones Industrial Average rose 0.6 per cent
The MSCI World index rose 0.3 per cent

Currencies

The Bloomberg Dollar Spot Index fell 0.2 per cent
The euro rose 0.3 per cent to US$1.0797
The British pound rose 0.4 per cent to US$1.2287
The Japanese yen fell 0.7 per cent to 131.59 per dollar

Cryptocurrencies

Bitcoin fell 2.9 per cent to US$27,006.81
Ether fell 3.3 per cent to US$1,704.21

Bonds

The yield on 10-year Treasuries advanced 16 basis points to 3.54 per cent
Germany’s 10-year yield advanced 10 basis points to 2.23 per cent
Britain’s 10-year yield advanced eight basis points to 3.37 per cent

Commodities

West Texas Intermediate crude rose 5.4 per cent to US$73 a barrel
Gold futures fell 1.3 per cent to US$1,975.70 an ounce