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Wall Street closed sharply higher on Tuesday as widespread fears over liquidity in the banking sector abated and market participants eyed the Federal Reserve, which is expected to conclude its two-day policy meeting on Wednesday with a 25-basis-point hike to its policy rate.

All three major U.S. stock indexes were bright green as the session closed, with energy, consumer discretionary and financials enjoying the most sizable gains.

Canada’s benchmark stock index also rose, closing at its highest level in a week, helped by gains in energy and financial shares after domestic data showed consumer prices easing more than expected in February.

A one-two punch of regional bank failures last week, followed by the rescue of First Republic Bank and the takeover of Credit Suisse, sparked a rout in banking stocks and fueled worries of contagion in the financial sector which, in turn, heightened global anxieties over the growing possibility of recession.

But banking stocks bounced back on Tuesday, building on Monday’s reversal. Still, despite its recent resurgence, the S&P Banks index has lost more than 18% of its value just this month.

Both the SPXBK and the KBW Regional Banking index jumped 3.6% and 4.8%, respectively, their biggest one-day percentage jumps since late last year.

“The stock market is coming to a recognition that the banking crisis wasn’t a crisis after all, and was isolated to a handful of banks,” said Oliver Pursche, senior vice president at Wealthspire Advisors in New York. “Both the public and the private sector have shown they are more than able to backstop and shore up weak institutions.”

Treasury Secretary Janet Yellen, in prepared remarks before the American Bankers Association, said the U.S. banking system has stabilized due to decisive actions from regulators, but warned more action might be required.

Attention now shifts to the Fed, which has gathered for its two-day monetary policy meeting, at which the members of the Federal Open Markets Committee (FOMC) will revisit their economic projections and, in all likelihood, implement another increase to the Fed funds target rate in their ongoing battle against inflation.

“The Fed will raise interest rates by 25 basis points and the market won’t care,” Pursche added. “It will all be about (Chairman Jerome) Powell’s statement on the economy and inflation, and if he can do a good enough job convincing the public that the banking noise” can be attributed to bad management on the part of a few banks.

Financial markets have now priced in an 83.4% likelihood of a 25 basis-point rate hike, and a 16.6% probability that the central bank will leave its policy rate unchanged, according to CME’s FedWatch tool.

Economic data released early in the session showed a 14.5% jump in U.S. existing home sales, blasting past expectations and snapping a 12-month losing streak.

Treasury yields gained, as improving risk sentiment reduced safe-haven demand for U.S. debt before the Federal Reserve concludes its two-day meeting on Wednesday.

Interest rate-sensitive U.S. two-year yields rose to 4.177% and are also up from a six-month low of 3.635% on Monday, but are sharply below the almost 16-year high of 5.084% hit on March 8.

The closely watched yield curve between U.S. two-year and 10-year notes remains deeply inverted at minus 58 basis points, a level that still indicates a looming recession, though it remains off its extreme levels of minus 111 basis points reached on March 8.

Canada’s annual inflation rate slowed more than expected in February to 5.2%, its lowest level in 13 months, backing up the Bank of Canada’s plans to hold off on further interest rates hikes.

Despite the tamer than anticipated inflation numbers, Canada’s 2-year bond yield was up more than 10 basis points in late afternoon trading – although the rise was more muted than the move in the equivalent U.S. yield.

Credit markets are continuing to bet an interest rate cut at the Bank of Canada is only months away. While they are currently pricing in only about a 12% chance of a cut next month, they are positioned for at least a quarter-point cut this summer, according to Refinitiv Eikon data late Tuesday.

The Dow Jones Industrial Average rose 316.02 points, or 0.98%, to 32,560.6, the S&P 500 gained 51.3 points, or 1.30%, to 4,002.87 and the Nasdaq Composite added 184.57 points, or 1.58%, to 11,860.11.

Eight of the 11 major sectors in the S&P 500 ended the session in positive territory, with energy stocks, boosted by rising crude prices, posting the largest percentage gains.

Shares of First Republic Bank soared by 29.5%, the company’s biggest-ever one-day percentage jump as JPMorgan CEO Jamie Dimon leads talks with other big banks aimed at investing in the lender, according to the Wall Street Journal.

Peers PacWest Bancorp and Western Alliance Bancorp also surged, leaping 18.8% and 15.0%, respectively.

Tesla Inc advanced 7.8% after the electric automaker appeared on track to report one of its best quarters in China, according to car registration data.

The Toronto Stock Exchange’s S&P/TSX composite index ended up 135.49 points, or 0.7%, at 19,654.92.

Heavily-weighted financials in Toronto rose 1.2%, while energy added 3.2% as the price of oil settled 2.5% higher at $69.33 a barrel.

Advancing issues outnumbered declining ones on the NYSE by a 3.22-to-1 ratio; on Nasdaq, a 2.73-to-1 ratio favored advancers. The S&P 500 posted 5 new 52-week highs and 2 new lows; the Nasdaq Composite recorded 48 new highs and 114 new lows. Volume on U.S. exchanges was 11.75 billion shares, compared with the 12.63 billion average over the last 20 trading days.

Canada’s annual inflation rate fell to 5.2 per cent in February, the biggest drop since the early stages of the pandemic, although grocery prices are still climbing by more than 10 per cent.

Financial analysts had been expecting an inflation rate of 5.4 per cent in Tuesday’s report from Statistics Canada. Inflation cooled from a 5.9-per-cent increase in the Consumer Price Index (CPI) in January. The slowdown was the largest since April, 2020.

Inflation is expected to cool further in the coming months. The Bank of Canada projects the annual rate of CPI growth will ebb to around 3 per cent by the middle of the year, then return to its 2-per-cent target by late 2024.

Financial analysts widely expect the central bank to hold its benchmark interest rate at 4.5 per cent in next month’s rate decision, on account of how inflationary pressures are waning.

The recent decline in the annual inflation rate is largely because the initial effects of Russia’s invasion of Ukraine – which led to spiking prices of commodities, such as crude oil and wheat – are no longer part of the year-over-year calculation of inflation, given the length of the war. This is known as a base effect.

Even so, short-term changes in prices have dampened. On a monthly basis, the CPI rose 0.1 per cent in February, after adjustments for seasonality, compared with a 0.3-per-cent gain in January.

There were, however, signs of stickiness. Excluding food and energy, core CPI was up 4.8 per cent on an annual basis in February, down slightly from a 4.9-per-cent gain in January

The Bank of Canada and other central banks are being tested by inflation that remains too high, but also by distress in the financial system, after the collapse of Silicon Valley Bank and the emergency takeover of Credit Suisse.

Unlike many of its peers, the Bank of Canada had already moved to the sidelines, putting a “conditional pause” on further increases to its benchmark interest rate. Inflation appears to be cooling more rapidly in Canada than in the United States and Britain.

“With inflation subsiding on both the headline and core measures, the Bank of Canada is in a less awkward position than many others during the recent financial turmoil. That is, there’s really no underlying reason for the Bank to hike further,” Bank of Montreal chief economist Doug Porter said in a note to clients.

“Over all, the Bank’s pause looks prudent, and we expect them to stay at current levels for quite some time, barring a major flare-up in the banking turmoil,” Mr. Porter added.

A noteworthy aspect of Statscan’s report is that the annual inflation rate was weaker than growth in average hourly wages, which rose 5.4 per cent in February from the previous year. It was the first time this measure of wage growth had exceeded inflation in two years. The average Canadian has experienced an erosion of purchasing power over this inflation crisis.

Gasoline has been a big contributor to slowing inflation. Prices at the pump fell nearly 5 per cent in February from a year earlier – the first annual drop since the outset of 2021.

There were other notable areas of decline. Child-care costs fell by 27.5 per cent on an annual basis as the national child-care deal led to a sharp reduction in fees.

Grocery prices rose 10.6 per cent on a 12-month basis in February. While that was improved from January’s pace of 11.4 per cent, it was the seventh consecutive month of double-digit increases.

“Continuing to put upward pressure on grocery prices are supply constraints amid unfavorable weather in growing regions, as well as higher input costs such as animal feed, energy and packaging materials,” Statscan said in its report.

The housing sector has been on a rollicking ride. Over all, shelter costs rose 6.1 per cent in February on a 12-month basis – better than 6.6 per cent in January. However, mortgage interest costs surged by nearly 24 per cent, the fastest pace since 1982.

In recent months, economists have looked to short-term trends in inflation for a sense of how the situation is changing. Expressed at an annualized rate, the three-month change in core CPI (excluding food and energy) was 3.4 per cent in February, up from 3.1 per cent in January – and just outside the Bank of Canada’s target range of 1 per cent to 3 per cent.

The central bank will make its next rate decision on April 12. Bank officials have said they would only resume hiking interest rates if they see an “accumulation of evidence” that consumer price growth is not easing as expected.

In response to the CPI report, financial analysts said the Bank of Canada is likely to stick with its pause.

“There was nothing in [Tuesday’s] inflation report that would move the Bank of Canada off of its pause on interest rate moves,” said Leslie Preston, senior economist at Toronto-Dominion Bank, in a note to investors. “Unlike the [U.S.] Federal Reserve, domestic inflation trends mean the BoC can ride out the current volatility in financial markets driven by stresses in the banking sector internationally.”

• The Federal Reserve is expected to increase interest rates by a quarter point Wednesday, even with concerns about stress in the banking system.
• The central bank is also expected to release projections about the economy and the path of rate hikes, though some economists say it may have a difficult time making those forecasts due to uncertainty.
• Investors are also looking for assurances from the Fed that the issues with regional banks will be contained.

https://www.cnbc.com/2023/03/21/fed-likely-to-raise-rates-by-a-quarter-point-but-it-must-also-reassure-markets-on-banking-system.html

The visit by China’s president, Xi Jinping, to Moscow this week comes at a time when Russia, and President Vladimir Putin, look vulnerable. Analysts are questioning what price China could extract from Russia in return for supporting it.China has a strategic interest in Putin’s war on Ukraine being victorious but it doesn’t want to risk Western sanctions on its own economy.

One of the big questions to emerge from the visit by China’s president, Xi Jinping, to Moscow this week is the degree to which it could help a geopolitically isolated Russia both on the battlefield, and off it — and what price it could extract for doing so.

It’s no secret that Russia would like China to help it out while it flounders in an economic and military quagmire brought about by its invasion of Ukraine a year ago. International sanctions have restricted or cut off Moscow’s access to numerous Western markets, while the ongoing war in Ukraine shows all the signs of turning into a bloody stalemate that could, if it loses, cause seismic political change in Moscow.

Against that backdrop, the current meeting between Xi and President Vladimir Putin in Moscow, into its second day on Tuesday, will see the leaders discuss the war in Ukraine and China’s peace plan, the Russian leader said as he welcomed his Chinese counterpart Monday.

Unofficially, however, analysts say the presidents are also likely to discuss ways for China to assist Russia without it risking being hit with Western sanctions itself.

Russia reportedly asked Beijing for military and economic assistance early on in its invasion to help it wage its war against Ukraine, although both governments publicly denied it. The eye of suspicion is still being cast on Beijing, despite its continuing denials that it could help Moscow with lethal weapons.

For many close watchers of Russia and China’s deepening relationship over the past decade, the big question then is this: What could China want in return for helping Moscow?

What does China want?

When geopolitical analysts discuss China, one aspect of Beijing’s foreign policy is agreed on fully: China never acts purely out of altruism and there is always a price (or perceived prize for Beijing) for its support or intervention.

https://www.cnbc.com/2023/03/21/what-does-china-want-from-russia-if-it-helps-it-with-ukraine.html

Crude oil prices climbed higher on Tuesday, gaining for a second straight session, amid improving risk sentiment thanks to the coordinated efforts by major central banks to rescue troubled U.S. and European banks.

The dollar was quite subdued today with investors looking ahead to the Federal Reserve’s monetary policy announcement on Wednesday.

West Texas Intermediate Crude oil futures for April ended higher by $1.69 or about 2.5% at $69.33 a barrel.

Brent crude futures were up $1.37 or 1.86% at $75.16 a barrel a little while ago.

Traders look ahead to weekly oil reports from the American Petroleum Institute (API) and U.S. Energy Information Administration (EIA). API’s report is due later today, while EIA is scheduled to release its inventory data at 10:30 AM ET on Wednesday.

A meeting of key ministers from OPEC+, which includes OPEC members plus Russia and other allies, is scheduled for April 3.

The Canadian market ended on a strong note on Tuesday, led by gains in healthcare, energy, technology and financials shares.

The undertone was quite positive right through the day’s session amid easing concerns about banking turmoil thanks to the coordinated steps taken by governments and the central banks to rescue troubled U.S. and European banks.

Investors looked ahead to the Federal Reserve’s monetary policy. The Fed is widely expected to raise interest rate by 25 basis points.

The benchmark S&P/TSX Composite Index ended with a gain of 135.49 points or 0.69% at 19,654.92 after scaling a high of 19,734.68.

The annual inflation rate in Canada fell to 5.2% in February of 2023, the least since January 2022, slowing from the 5.9% in the previous month amid significant base-year effects.

Core consumer prices in Canada increased 0.5% from a month earlier in February of 2023, following a 0.3% rise in January.

Hut 8 Mining Corp (HUT.TO) soared more than 9% on huge volumes.

Crescent Point Energy (CPG.TO) surged nearly 7.5%. Baytex Energy (BTE.TO), Shopify Inc (SHOP.TO), Cenovus Energy (CVE.TO), Athabasca Oil Corporation (ATH.TO) and Canadian Natural Resources (CNQ.TO) gained 3 to 5%.

Suncor Energy (SU.TO), Canadian Imperial Bank of Commerce (CM.TO), Lundin Mining Corporation (LUN.TO), Bank of Nova Scotia (BNS.TO), Algonquin Power & Utilities Corp (AQN.TO), TC Energy Corporation (TRP.TO), Manulife Financial Corporation (MFC.TO) and National Bank of Canada (NA.TO) gained 1 to 2.8%.

Precision Drilling Corporation (PD.TO) rallied 8.7%. Canadian Utilities (CU.X.TO) and Canadian Tire Corporation (CTC.TO) surged 6.6% and 6.2%, respectively.

Fairfax Financial Holdings (FFH.TO), Nuvei Corp (NVEI.TO), Bombardier Inc (BBD.A.TO), goeasy (GSY.TO), Kinaxis Inc (KXS.TO), Cargojet (CJT.TO), Nutrien (NTR.TO) and BRP Inc (DOO.TO) also posted strong gains.

Fortis Inc (FTS.TO), Franco-Nevada Corporation (FNV.TO), Agnico Eagle Mines (AEM.TO), Teck Resources (TECK.A.TO), Loblaw Companies (L.TO) and Stantec (STN.TO) ended sharply lower.

Oil prices dropped to their lowest in 15 months on Monday, driven down by concern that risks in the global banking sector and a potential increase to U.S. interest rates could spark a recession that would sap fuel demand.

In volatile trading, Brent crude futures for May fell 87 cents, or 1.2 per cent, to $72.10 a barrel by 1211 GMT. The U.S. West Texas Intermediate crude contract for April was down 85 cents, or 1.3 per cent, at $65.89 before its expiry on Tuesday.

The more actively traded May futures were down 1.2 per cent at $66.11 a barrel.

Brent and WTI earlier fell by about $3, hitting lows last registered in December 2021, with WTI sinking below $65 a barrel. Both benchmarks shed more than 10 per cent of their value last week as the banking crisis deepened.

The slide in oil comes despite the historic deal for UBS, Switzerland’s largest bank, to buy Credit Suisse in an attempt to rescue the country’s second-biggest bank.

However, banking stocks and bonds continued to plunge on Monday in a sign that investor confidence remains fragile.

After the deal was announced, The U.S. Federal Reserve, European Central Bank and other major central banks pledged to enhance market liquidity and support other banks.

“The market focus is on current banking sector volatility and the potential for further rate hikes by the Fed,” said Baden Moore, National Australia Bank’s head of commodity research.

The U.S. Federal Reserve is expected to raise interest rates by 25 basis points on March 22 despite the recent banking sector turmoil, according to most of the economists polled by Reuters.

However, some executives are calling on the central bank to pause its monetary policy tightening for now but be ready to resume raising rates later.

“Volatility is likely to linger this week, with broader financial market concerns likely to remain at the forefront,” ING Bank analysts said in a note, adding that the looming Fed decision increases week’s Fed meeting adds to uncertainty in markets.

Further out, a ministerial committee of OPEC and producer allies including Russia, together known as OPEC+, is set for April 3. The group agreed in October to cut oil production targets by 2 million barrels per day until the end of 2023.

North Korean leader Kim Jong Un has called on his country to be ready to launch a nuclear attack to deter war as he accused the U.S. and South Korea of carrying out military drills with American nuclear assets, according to state media. 

Kim’s remarks, carried on state media KCNA, came after the Hermit Kingdom launched a short-range ballistic missile toward the sea on Sunday. The missile flew across the country and landed in the sea off its east coast, according to South Korean and Japanese assessments – which reported that the missile traveled a distance of about 500 miles. 

FILE: North Korean leader Kim Jong Un attends the 7th enlarged plenary meeting of the 8th Central Committee of the Workers’ Party of Korea (WPK) in Pyongyang, North Korea, March 1, 2023 in this photo released by North Korea’s Korean Central News Agency (KCNA).  (KCNA via REUTERS)

Kim, who oversaw the test, said the exercises improved the military’s actual war capability and highlighted the need to ensure its readiness posture for any “immediate and overwhelming nuclear counterattack” through such drills. 

KCNA quoted Kim as saying the North “urgently” needed to bolster up its nuclear war deterrence exponentially as the enemies “are getting ever more pronounced in their moves for aggression against” his country. 

US AND ITS PARTNERS STAGE WARFARE DRILLS AS JAPAN, SOUTH KOREA STRENGTHEN ALLIANCE AGAINST CHINA, NORTH KOREA

“The nuclear force of the DPRK will strongly deter, control and manage the enemy’s reckless moves and provocations with its high war readiness, and carry out its important mission without hesitation in case of any unwanted situation,” Kim was quoted as saying. 

KCNA photos showed Kim attending the test with his young daughter as flames roared from the soaring missile before it hit the target.

Consumer sentiment in the U.S. fell for the first time in four months in March, according to a preliminary report released by the University of Michigan on Friday.

The report said the consumer sentiment index slid to 63.4 in March from 67.0 in February. Economists had expected the index to be unchanged.

Surveys of Consumers Director Joanne Hsu noted the decrease was already fully realized prior to the failure of Silicon Valley Bank.

“Sentiment declines were concentrated among lower-income, less-educated, and younger consumers, as well as consumers with the top tercile of stock holdings,” Hsu said.

She added, “Overall, all components of the index worsened relatively evenly, primarily on the basis of persistently high prices, creating downward momentum for sentiment leading into the financial turmoil that began last week.”

The current economic conditions index fell to 66.4 in March from 70.7 in February, while the index of consumer expectations dropped to 61.5 from 64.7.

Meanwhile, the report showed decreases in both near-term and long-term inflation expectations, with year-ahead inflation expectations falling to the lowest level since April 2021.

One-year inflation expectations slipped to 3.8 percent in March from 4.1 percent in February, while five-year inflation expectations edged down to 2.8 percent from 2.9 percent.