The failure of Silicon Valley Bank and Signature Bank in March, and the current turmoil at First Republic Bank, could put further pressure on the U.S. benchmark index to raise above its band of resistance between 4,195 and 4,325.

On Monday regulators seized control of First Republic Bank and accepted a bid from JPMorgan for a substantial amount of the lender’s assets. This is the third financial institution taken under government control over the last two months following a series of bank runs and is the latest event in a period of banking turmoil that has roiled the U.S. financial system.

First Republic Bank marks the second-biggest bank failure in U.S. history after Washington Mutual collapsed at the height of the 2008 financial crisis, which also was sold to JPMorgan in a similar government-orchestrated deal.

First Republic troubles emerged since the U.S. regulators took over Silicon Valley Bank and Signature Bank in March, but its death spiral started last Monday, when the bank announced that it had lost about $100 billion of deposits in the first quarter of 2023.

Unlike Silicon Valley and Signature Bank, whose failures had threatened to spark more bank runs, at present the situation appears to be calmer. First quarter earnings reports from smaller lenders showed deposit outflows have largely stabilized.

Source: Tradingview, Daily Chart: S&P 500

The renewed banking turmoil is unlikely to result in financial contagion, therefore, the Fed would likely go ahead with one last rate hike this week. Markets are pricing in an 85% chance the Fed to raise interest rates by 25-basis points at its meeting on Wednesday to a range of 5.0%-5.25% according to the CME FedWatch tool, and a 62% chance the Fed will pause interest rates in June.

Since last March, the Fed has raised interest rates by 500 basis points, which is one of most aggressive tightening cycles since the late 1970s. Tight monetary policy, whose impact has not fully materialised yet but it’s likely to over the next few quarters, combined with tighter lending conditions, is likely to further slowdown growth throughout 2023.

Investors are hoping for a rate cut; however, policymakers are not sharing that sentiment. The gradual moderation of inflation means interest rates are close to a pivotal point and rate cuts are on the horizon, potentially toward the end of the year or early next year.

The index has been searching for direction and has traded in a narrow range over the past month. In the short-term, the stock market is likely to encounter resistance around 4,125 and continue to trade sideways, after Treasury Secretary Janet Yellen said the U.S. government could run out of money within a month and will be unlikely to meet all payment obligations by « early June ».

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