Nasdaq, S&P, Dow find surer footing as traders mull possible end to Fed rate hikes

U.S. stocks on Monday appeared to have found some stable footing after opening lower, with market participants dumping financial names and flocking to safe assets such as Treasury yields and gold after the collapse of Silicon Valley Bank (SVB).

Traders rushed to reassess their Federal Reserve rate hike expectations and made bets that the central bank would recalibrate its plans for interest rate increases to prevent financial instability. Markets are now pricing in a decent chance that there might be no rate hike at all at the Fed's upcoming monetary policy committee meeting next week.

The tech-heavy Nasdaq Composite (COMP.IND) was up 0.89% to 11,238.09 points in morning trade, while the blue-chip Dow (DJI) was higher by 0.76% to 32,151.10. The benchmark S&P 500 (SP500) had added 0.62% to 3,885.80 points.

Of the 11 S&P sectors, seven had now pushed into the green, led by defensive sectors Utilities and Real Estate. Financials slipped nearly 3% and topped the losers.

Last week, headlines were dominated by woes in the financial sector after the liquidation of crypto-friendly bank Silvergate (SI) and the collapse of SVB, which is owned by parent firm SVB Financial (SIVB). SVB's closure marked the second-largest bank failure in U.S. history after the 2008 cratering of Washington Mutual.

Over the weekend, another major financial institution in the form of Signature Bank (SBNY) was taken over by New York regulators to protect depositors.

The Federal Reserve on Sunday moved to stem fears of a wider contagion spreading through the financial sector due to the collapse of SVB and Signature Bank (SBNY). The central bank's board said it would make additional funding available to eligible depository institutions and is prepared to address liquidity pressures that may arise.

Treasury yields continued their slide on Monday. The 10-year Treasury yield (US10Y) fell 24 basis points to 3.46% and the 2-year yield (US2Y) fell a whopping 57 basis points to 4.02%.

"At first glance, it may seem a bit incongruous that the Fed’s been laboring to tighten financial conditions, and then at the first hint of stress, it pulls out the stops to prevent that from metastasizing further," JPMorgan's Michael Feroli said in a research note on Sunday.

'While the Fed wants tighter financial conditions to restrain aggregate demand, they don’t want that to occur in a non-linear fashion that can quickly spiral out of control, perhaps to the detriment of the taxpayer. And while they want credit to become more expensive, they shouldn’t want creditworthy borrowers to be shut out at any price. If they indeed have used the right tool to address financial contagion risks (time will tell), then they can also use the right tool to continue to address inflation risks—higher interest rates. So, we continue to look for a 25bp hike at next week’s meeting," Feroli added.

Traders have once again rushed to recalibrate their expectations for further Fed rate hikes and are reassessing the central bank's willingness to possibly threaten financial instability with continued interest rate increases.

According to the CME FedWatch tool, markets are now pricing in a 64.2% probability of a 25 basis point hike at the monetary policy committee meeting later this month, and a 35.8% probability of no hike at all. To get an idea of just how much rate hike expectations have been adjusted, only last week markets were seeing an 80% chance of a 50 basis point hike at the March meeting.

Among active stocks, there were some moves on a few merger deals. Shares of Provention Bio (PRVB) more than tripled in value after it agreed to be bought by Sanofi (SNY). Meanwhile, Seagen (SGEN) surged after a deal to be acquired by Pfizer (PFE).

Finally, Qualtrics (XM) also rose after the software company said it would sell itself to private equity firm Silver Lake and the Canada Pension Investment Board.

Many financial stocks were halted following steep declines, including First Republic Bank (FRC) which earlier cratered amid contagion fears sparked by the failures of SVB and Signature Bank (SBNY).