New York, May 4 Wall Street is trading lower early on Thursday despite the market's belief that the Federal Reserve's monetary tightening is now on "pause," as concerns about the health of regional banks linger and credit conditions spawn more bankruptcies.
Ten of the 11 S&P 500 sectors are lower, led by financials, while real estate is the sole gainer.
The Dow Transports, small caps and semiconductors are all down more than 1%, while regional banks are lower by more than 5%.
However, the FANG index is posting a small rise.
The market in general has viewed the Fed's statement and Chair Powell's comments on Wednesday following the two-day policy meeting as dovish, with futures now pricing in three rate cuts by December.
Goldman Sachs said late Wednesday that if Powell thinks a recession is not necessary to subdue inflation, he will be reluctant to deliver future hikes that he sees materially raising the risk of pushing the economy into a recession.
But tighter credit conditions are still a concern. Until the economic impact of tighter credit conditions resulting from the March banking sector stresses are better understood, taking a breather on rate hikes is warranted, Federated Hermes said.
S&P Global Market Intelligence on Thursday is reporting bankruptcy filings have pushed the year-to-date count to 236, more than double the comparable figure a year ago and higher than any of the prior 12 years.
Larger bankruptcy cases are rising in 2023 alongside a broader increase in filings. Eight companies filed for bankruptcy protection in the first four months of 2023 that listed liabilities over $1 billion, it said.
Apple is due to report its quarterly numbers after the close.
Banks dip
First Republic Bank's collapse this week has triggered a sharp drop in shares of regional US lenders despite regulatory efforts to call an end to the banking crisis that began with the failures of Silicon Valley Bank and Signature Bank in March.
Retail investors are on a buying spree, with regional banks down 8.9% so far this week.
Despite sitting on about 31% losses on their financials purchases since the beginning of March, retail investors bought the dip again on Wednesday, according to Vanda Research.
"On balance, with retail investors buying the dip quite aggressively yesterday it is quite plausible that they constituted exit liquidity for hedge funds," they added.
Big banks like Bank of America, regional banks who are perceived as safer such as Truist Financial Corporation and diversified ETFs like the SPDR S&P Regional Banking ETF drew larger retail inflows on Wednesday, according to Vanda.
Individual investors, nonetheless, sold Western Alliance Bancorp for their fourth straight session despite the U.S. regional bank's efforts to reassure investors that it had not seen unusual deposit outflows following the sale of collapsed lender First Republic Bank to JPMorgan Chase & Co on Monday.
CRUDE OIL FUTURES:
Rocked by recession fears, NYMEX crude oil futures have been on the back foot. That said, the futures are attempting to make a stand on Thursday as they test key chart support.
Despite U.S. crude oil inventories falling for a third week in a row and the U.S. Strategic Petroleum Reserve hitting its lowest levels since October 1983, a surprise rise in gasoline stocks on weakened demand, coupled with the Fed's 10th-straight interest rate hike on Wednesday, may have dented sentiment enough to cause a swoon in Thursday's trading.
The futures slid to $63.64, or their lowest level since early December 2021:
With this, futures once again tested support at the 200-week moving average (WMA), which has proven to be a long-term magnet. It now resides around $66.85.
Additionally, the futures flirted with the 38.2% Fibonacci retracement of the April 2020-March 2022 advance, at $65.25, the March 2023 low at $64.12, and a weekly Gann Line that now provide supports around $63.50.
The Dec. 2, 2021 low was at $62.43, and the Aug. 23, 2021 trough was at $61.74. Thus, there is a wealth of support in the mid-to-low $60s that may serve to continue to stem weakness.
The futures have subsequently snapped back to the $69 area, and are forming a daily hammer candle. If this pattern holds through the close, it may signal a bottom and trend reversal.
As stands, in order to add confidence in a turn, traders will want to see Friday's close above $72.31 to form a hammer on a weekly basis.
In any event, if the daily pattern evaporates and support gives way, the 50% retracement of the April 2020-March 2022 advance is at $45.09, so additional downside could be severe.
Meanwhile, the S&P 500 energy sector, which ended at 607.37 on Wednesday, is once again teetering as it breaks its 12-month moving average, which now resides around 632.70.