Stock futures are down but off their lows as concerns linger over banking system

What’s driving markets

U.S. stocks turned modestly higher Friday afternoon and were on track for 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, -3.16% 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.

“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 well as the broader market as banking-sector fears reemerged. Shares of UBS Group UBS, -0.68%, which recently agreed to buy rival Credit Suisse Group, traded lower.

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 was trading down 0.1% Friday afternoon, according to FactSet data, at last check.

While the banking-sector drama has hammered the financial sector in March, the outperformance of megacap technology stocks and other sectors has helped to limit losses for U.S. stocks. The S&P 500 is down by just 0.2% so far this month, FactSet data show, at last check.

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 the latest drop in Treasury yields could help cushion some of the stress facing the banking sector.

Treasury yields continued to decline on Friday, with the spread between the 2-year Treasury note yield TMUBMUSD02Y, 3.783% and the 10-year note TMUBMUSD10Y, 3.387% narrowing to around 40 basis points, from 100 basis points just a few weeks ago.

Read: ‘Red alert recession signals.’ Gundlach expects the Fed to cut rates substantially ‘soon.’

In U.S. economic data released Friday, a report on sales of durable goods in the U.S. 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 from 50.5 in the prior month.

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, -3.16% shares were down 8.5% but off lows seen when the German bank’s credit default swaps jumped without an apparent catalyst.
• Wells Fargo WFC, -1.01% shares were down 0.4% while JPMorgan JPM, -1.62% fell 1.4%, with bank stocks remaining under pressure in the wake of regional U.S. bank failures.
• Activision Blizzard ATVI, +5.72% climbed 5.5% 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, +0.53% rose 0.4%

–Steve Goldstein contributed to this report.