Aurelia Butler

NEW YORK (Reuters) – Economically sensitive areas of the U.S. stock market are flashing warnings over growth, even as major equity indexes edge higher.The S&P 500 is up 8.6% for the year after gaining 1.5% in April, thanks to roaring year-to-date rallies in shares of Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Google-parent Alphabet (NASDAQ:GOOGL) and other growth and technology stocks that command heavy weightings in broader indexes. Beneath the surface, however, areas of the market tied to economic sentiment such as transports, semiconductors and small-cap stocks dropped in April, while so-called defensive sectors are outperforming. Investors cited growing caution among market participants faced with a thicket of concerns, from fears of a possible U.S. default this summer to worries that the Federal Reserve’s aggressive monetary tightening could bring on a recession. “People are starting to more defensively position themselves,” said Aaron Dunn, co-head of the value equity team at Eaton (NYSE:ETN) Vance. “The overall signal to me is there is still a lot of fear about recession and oncoming weakness in the back half of the year.”Areas of the market showing cracks include the Russell 2000, an index populated by smaller, domestically focused companies, which was down 1.9% for the month. The Dow Jones Transportation Average, another bellwether of economic health, fell 2.9%. A 7.3% drop in the Philadelphia SE Semiconductor index was a worrying sign, as chips are ubiquitous in a wide range of products. The index is still up 18% for the year. Regional banks are also wobbling, with the KBW Regional Banking index down 3.5% in April following a rout this week in shares of First Republic Bank (NYSE:FRC). At the same time, consumer staples and healthcare, sectors favored by investors during uncertain times, have rallied in the past month.Investors will focus on next week’s Fed meeting, with the central bank expected to announce another 25 basis point rate hike on Wednesday. A bevy of earnings are also on deck, including results from Apple (NASDAQ:AAPL) on Thursday.Though the S&P 500 has shown resilience, just seven stocks — Apple, Microsoft, Alphabet, Amazon, Tesla (NASDAQ:TSLA) Meta Platforms and Nvidia (NASDAQ:NVDA) — were responsible for more than 88% of its year-to-date gain as of Thursday, according to Mike O’Rourke, chief market strategist at Jones Trading.“It makes me nervous to be honest,” said James Ragan, director of wealth management research at D.A. Davidson. “It just seems like the market gains are being concentrated in fewer and fewer stocks and that is probably unsustainable for too long.”Ragan is recommending clients overweight defensive sectors such as healthcare, staples and utilities.While results from megacaps and strong economic reports buoyed optimism among some on Wall Street, others focused on downbeat news from companies in economically sensitive areas. Shares of United Parcel Service (NYSE:UPS) tumbled 10% on Tuesday after the world’s largest parcel delivery firm pegged annual revenue at the lower end of its forecast and warned of persistent pressure on volumes. The next day, shares of Old Dominion Freight (NASDAQ:ODFL) Line also dropped 10% after the trucking firm missed quarterly estimates for profit and revenue.”They are talking about demand being down and they are ridiculously important shipping companies,” said Matt Maley, chief market strategist at Miller Tabak. Both stocks are part of the closely watched Dow Jones Transport Average, which was down 2.7% on the week and off 10% from its high for the year reached in February.Maley is recommending clients hold higher-than-typical cash levels because of concerns about a recession and because safer assets now have higher yields, while favoring energy and defense stocks.Of course, not all signs have pointed to economic weakness in recent weeks.Overall, earnings have come in better than feared for the first quarter. With just over half of the S&P 500 having reported, earnings are on pace to have declined 1.9% for the first quarter from the year earlier period, according to Refinitiv. That is a smaller decline than the 5.1% drop expected at the start of April.Meanwhile, data on Thursday showed an acceleration in consumer spending in the first quarter as U.S. gross domestic product increased at a 1.1% annualized rate.    “It’s hard to have a recession when consumers’ incomes are rising, and they are spending more on both goods and services,” Yardeni Research said in a note on Friday. More

(Reuters) – U.S. regulators on Friday put large banks on notice that tougher oversight is coming, after the Federal Reserve and Federal Deposit Insurance Corporation detailed their supervisory lapses before deposit runs caused the collapse of Silicon Valley Bank and Signature Bank (OTC:SBNY) in March. Though the banking sector broadly has since stabilized, the far-reaching impact of the failures of those two large regional banks was felt on Friday as an even larger lender, First Republic Bank (NYSE:FRC), teetered on the brink of collapse.Regulators were preparing to shut San Francisco-based First Republic, a person familiar with the matter told Reuters. Depositors had pulled $100 billion from accounts at the bank in the panic triggered by the SVB and Signature failures, imperiling its survival. The Fed’s assessment of its inadequacies in identifying problems and pushing for fixes at Santa Clara, California-based SVB came with promises for tougher supervision and stricter rules for banks. “Our first area of focus will be to improve the speed, force, and agility of supervision,” Fed Vice Chair of Supervision Michael Barr said in a letter accompanying a 114-page report supplemented by confidential materials that are typically not made public and which documented rising concern – but little action – over lax risk management. Barr also signaled plans to subject banks with more than $100 billion in assets to rules currently reserved for bigger rivals, given that increased capital and liquidity requirements would have bolstered SVB’s resilience. “Our experience following SVB’s failure demonstrated that it is appropriate to have stronger standards apply to a broader set of firms.”Separately, the FDIC delivered a 63-page account of its failings in the collapse of Signature, and those of the New York-based lender’s management, to fix persistent weaknesses in liquidity risk management and over-reliance on uninsured deposits. Both SVB and Signature failed last month. “In retrospect, the FDIC could have acted sooner and more forcefully to compel the bank’s management and its board to address these deficiencies more quickly and more thoroughly,” it said.Both reports said the banks’ managers were primarily to blame for prioritizing growth and ignoring basic risks that set the stage for the failures.And while they both identified supervisory misjudgments – the Fed’s report was particularly scathing – both stopped short of laying the responsibility for the failures at the feet of any specific senior leaders inside their oversight ranks. The FDIC did point to Signature’s ex-CEO Joseph DePaolo, though not by name, as having personally “rejected” examiner concerns about uninsured depositors on March 10, the day of the bank’s crippling run. Former SVB CEO Greg Becker was mentioned only once in the Fed’s report – in reference to his having also been on the board of directors at the San Francisco Fed.REACTION Before the twin failures in March, banking regulators had focused most of their firepower on the very biggest U.S. banks that were seen as critical to financial stability.At the Fed that was in part due to new central bank “tailoring” regulations written in 2018 under Barr’s predecessor, Randal Quarles, the report said, and to a shift in expectations for supervisors to accumulate more evidence before considering taking action. Fed staff said they felt pressure during this period to reduce burdens on firms and demonstrate due process, according to the report. Quarles did not immediately respond to a request for comment.The lack of forceful examiner action was a “clear failure of supervisory culture,” said Senator Tim Scott, the top Republican on the Senate Banking Committee. Scott, a potential U.S. presidential candidate in 2024, pushed back on re-imposing stricter rules that he said would punish well-run banks for the “unique” problems of their failed competitors.Industry did as well.”The Federal Reserve’s report lays blame at changes to regulation and supervision made in recent years, when its own examination materials make plain the fundamental misjudgments made by its examination teams over that same period,” Greg Baer, the president and CEO of the Bank Policy Institute, said in a statement.Still, any changes would give banks plenty of time to adjust, noted Eric Compton, a banking analyst at Morningstar. “I think many investors were worried about the regulators dropping the hammer on the whole banking industry, quickly.” ‘POOR MANAGEMENT’At SVB, the Fed said, supervisors did not fully appreciate the problems and failed to appropriately escalate certain deficiencies even after they were identified. At the time of its failure, SVB had 31 unaddressed citations on its safety and soundness, triple what its peers in the banking sector had, the U.S. central bank’s report said, including problems with interest-rate-risk modeling that examiners directed be addressed by June 2023.Regulators shut SVB on March 10, a day after customers withdrew $42 billion and queued requests for another $100 billion the following morning.The Fed is considering forcing better compliance from management by tying prompt fixes to executive compensation, a senior Fed official indicated on Friday.Both SVB and Signature grew quickly in recent years, outpacing the ability of regulators to keep up, especially with shrinking resources.Between 2016 and 2022, as assets in the banking sector grew 37%, the Fed’s supervision headcount declined by 3%, according to the report.In regards to Signature since 2020, an average of 40% of positions in the FDIC’s large bank supervisory staff in the New York region were vacant or filled by temporary employees, the FDIC report said. Signature’s failure, the FDIC said in its report, was caused by “poor management” and a pursuit of “rapid, unrestrained growth” with little regard for risk management.Regulators closed Signature two days after SVB was shuttered. Signature lost 20% of its total deposits in a matter of hours on the day that SVB failed, FDIC Chair Martin Gruenberg has said. More

Meanwhile, U.S. officials are coordinating urgent talks to rescue First Republic Bank (NYSE:FRC) as private-sector efforts led by the San Francisco-based bank’s advisers have yet to reach a deal, three sources familiar with the situation told Reuters.Many commentators linked the lessons learned from the earlier crisis to the ongoing concerns about First Republic Bank.Following are comments from market participants and analysts on the Fed’s report:BANK POLICY INSTITUTE PRESIDENT AND CEO GREG BAER “Unfortunately, and in contrast to the accurate and objective review of the problems leading to the failure of SVB provided by the GAO’s (Government Accountability Office) report, the Federal Reserve’s report lays blame at changes to regulation and supervision made in recent years, when its own examination materials make plain the fundamental misjudgments made by its examination teams over that same period. “For example, SVB consistently failed the internal liquidity stress tests it was required to perform, but Fed examiners did not require it to improve its liquidity situation, suggesting that the regulations were fit for purpose, but the examiner response was inadequate.””Lastly, we are disappointed that the Fed’s report has proceeded to make policy recommendations without input from the public or Congress and without the benefit of a broader and deeper investigation. Particularly remarkable is a reflexive and largely unexplained demand for higher capital requirements, which no independent observer has identified as playing any material role in SVB’s failure.”For the full comment: FINANCIAL SERVICES FORUM PRESIDENT AND CEO KEVIN FROMER “One should not conflate a liquidity-driven event marked by management failures and supervisory shortcomings with capital adequacy at the largest U.S. banks. The assertion in the introduction that the Fed should focus on large bank capital requirements is disconnected from the report’s conclusions.”The resiliency of the nation’s largest banks, which are subject to the most stringent regulation and supervision, is not at issue. These firms have demonstrated through the pandemic and during the most recent events that they are a source of strength and support.”AMERICAN BANK ASSOCIATION PRESIDENT AND CEO ROB NICOLS “We take any bank failure seriously, and we will review the findings and proposed policy changes in these reports carefully, including where the conclusions may differ. At the same time, we urge policymakers to refrain from pushing forward new and unrelated regulatory requirements that could limit the availability of credit and the ability of banks of all sizes to meet the needs of their customers and communities when these reports suggest that existing rules were sufficient.”Finally, we want to highlight what these reports also make clear: the failures of these individual institutions reflect the unique circumstances at these banks and do not reflect the overall health and vitality of the U.S. banking sector.CONSUMER BANKERS ASSOCIATION PRESIDENT AND CEO LINDSEY JOHNSON”Today’s reports confirm there were a multitude of factors contributing to the collapse of these institutions, with each bank facing challenges that were unique to them. At the same time, the entire industry continues to navigate economic headwinds, including record-high inflation and unprecedented interest rate hikes. Our members are tackling these challenges head-on and are well-positioned to support America’s families and small businesses through this next phase of the economy – just as they did through the COVID-19 pandemic.”JONATHAN MONDILLO, HEAD OF NORTH AMERICAN FIXED INCOME AT ABRDN”We’re likely to see higher capital requirements. What that means for the overall markets is that the devil is in the details: how stringent those capital requirements will be. The government would be probably best not to over-regulate or to make the liquidity and capital requirements too overly cumbersome for especially the smaller banks and the regional banks because, at the end of the day, you know, they’re providing credit and providing loans to essential businesses, mom and pops. They provide a need in the overall economy. If they over-regulate, what we would find is that there would be a bit of credit dried up.”ERIC COMPTON, A BANKING ANALYST AT MORNINGSTAR”Overall, I think this is a good indicator for the banks. I think a lot of the uncertainty for the banks after earnings was around how hard and how quickly the regulators would crack down on the industry in general. To me, the fact that the regulators specifically call out that this will be a several-year process with an appropriate phase-in period is key.”MATT FREUND, CO-CHIEF INVESTMENT OFFICER AT CALAMOS INVESTMENTS”Regulators are going to make it harder for everyone to try to minimize the problems that we’ve seen with a few. It’s always good if you make it harder for the folks that are causing problems, but it’s less good when you make it harder on the good players who weren’t causing problems. It’s hard for me to say if it’s good or not or uniformly good.”MICHAEL PIERSON, MANAGING PARTNER OF GLOBAL CORPORATE AT FISHERBROYLES”It is an extremely prudent step by the Fed to acknowledge its supervisors’ failure to appreciate SVB’s vulnerabilities and inability to take sufficient steps to fix SVB’s problems. Sharing in the responsibility should enable a more effective dialogue between banks and prudential regulators over the coming months as the Fed seeks to implement the stronger supervisory and regulatory framework outlined in the report. Humility in the face of failure shows strength.”MORRIS PEARL, A FORMER MANAGING DIRECTOR AT BLACKROCK AND THE CHAIR OF PATRIOTIC MILLIONAIRES”The regulators knew about the problems at SVB months in advance. Despite that, the bank failed, which shows there is a need for better supervision. Usually, regulators are trying to walk the tightrope where they do not want to be overly restrictive and limit growth. But recent events show we need to take a closer look at the existing rules and strengthen mechanisms to restore confidence in regional banks.”INSTITUTE OF INTERNATIONAL BANKERS CEO BETH ZORC”The IIB commends the Federal Reserve’s timeliness of producing its report on SVB. Consistent with our mission, IIB will work to ensure a continued level playing field for internationally headquartered financial institutions operating in the U.S. Preserving this principle will further the significant contributions of these institutions to the American economy.”JACOB S. FRENKEL, CHAIR OF LAW FIRM DICKINSON WRIGHT’S GOVERNMENT INVESTIGATIONS AND SECURITIES ENFORCEMENT PRACTICE GROUP”Such transparency and candor is healthy to identify needed regulatory fixes to reduce the likelihood of further collapses. Nevertheless, regulatory oversight of bank practices also depends on the competencies and strengths of the individuals tasked with conducting the examinations and supervision. Regardless, this assessment will not temper the aggressive federal civil and criminal investigations that are well underway and likely will lead to actual cases.”MAYRA RODRIGUEZ VALLADARES, A FINANCIAL RISK CONSULTANT WHO TRAINS BANKERS AND REGULATORS “Reading the report, one can wonder how this bank did not fail before. I was not surprised the Fed had warned SVB about its poor interest rate risk management. What is more of a surprise is the Fed had also warned SVB about IT, operational risk, internal audit and even problems with Current Expected Credit Loss measurements, considering the Fed and the California regulator knew SVB had poor compliance and internal controls with the Bank Secrecy Act and anti-money laundering back in 2016. Clearly, bank examiners and off-site supervisors were not empowered to bring these issues to decision makers at the Fed to act. The former administration seemed eager to undo Dodd-Frank Act”DAVID SMITH, A BANK ANALYST AT AUTONOMOUS RESEARCH”The report confirms the theories that market observers had been suspecting and the need for improving capital and liquidity requirements for mid-sized banks will be addressed. At this point, broader banking concerns around the health of the financial system have come down slightly. But it will help shore up relative weaker points in the regulatory and supervisory system which can make the banking system more resilient.”TIMOTHY COFFEY, AN ANALYST AT JANNEY MONTGOMERY SCOTT LLC”The report doesn’t tell us anything we didn’t know about regulatory risks in the bank and the system which the regulators were also aware of. It does suggest some regulatory enhancement for certain banks – such as a limit on capital distribution or clamp-down on company executive pay for some banks – which would incentivize the management not to take risks and avoid getting into situations like we saw with SVB and First Republic.”WAYNE SCOTT, REGULATORY COMPLIANCE SOLUTIONS LEAD AT NCC GROUP SOFTWARE RESILIENCE”Should the bank fail, it is hard to predict the impact it will have on other regional banks right now. But it is safe to say that any collapse usually has negative effects on the market and the wider economy.””There are similarities between SVB’s situation and what is happening with First Republic Bank: both are affected by the rapid movement of very large sums of money.””SVB presented a risk to the short-term cash flow of the tech industry. A potential First Republic Bank failure could similarly present a risk to the long-term investment strategy of high net-worth individuals.””There’s potential for contagion to spread within financial services following such a failure. That contagion would become troubling.” More

Poland and three other EU member states are to lift a ban on imports of Ukrainian foodstuffs under a deal reached with Brussels on Friday.The unilateral measures had raised tensions with other member states who accused Poland, Hungary, Slovakia and Bulgaria of deserting Kyiv in its hour of need as it fights Russian aggression.The European Commission will impose temporary curbs on a more limited range of products, accepting that a glut of grain in the countries has caused hardship for their farmers.The measures will also cover Romania which had also complained about low grain prices as its warehouses filled with Ukrainian imports. However, it had not taken unilateral action. They are expected to take effect in the coming weeks.Wheat, maize, oilseed and sunflower seed will only be allowed into those countries if they are in transit to other destinations. Valdis Dombrovskis, EU trade commissioner, announced the deal on Friday evening.“The neighbouring member states will be withdrawing their unilateral measures,” he said. “We have a solution which addresses the concerns both of farmers in neighbouring member states and of Ukraine.”The commission will also investigate whether the curbs should be extended to other commodities such as eggs and meat. Brussels acted swiftly after some of Ukraine’s most loyal allies took the steps because of protests by farmers.The five countries will receive €100mn from EU funds to compensate farmers.The EU dropped tariffs and quotas on foodstuffs from Ukraine, an agricultural powerhouse, to assist it after the Russian invasion. However, much of the Ukrainian grain entering the bloc had remained in bordering countries because of the high cost of transporting it to traditional markets such as Africa.The unexpected success of a deal with Russia and Turkey to export grain via the Black Sea has also diminished demand for land routes set up by the EU. EU member states agreed as well on Friday to extend the wartime trade regime with Ukraine for another year, until June 2024. A revised version will have stronger provisions that allow the EU to take measures to “safeguard” its own market more rapidly in future.Brussels also promised to help organise convoys of trucks, trains and barges to transport the grain to ports where it can be sent to countries in need. More