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Market Snapshot: Dow posts best day since January despite bank woes, uncertain Fed rate path

U.S. stocks resumed their rally in Monday afternoon trading as investors looked favorably upon the latest efforts to stave off a global bank crisis ahead of this week’s Federal Reserve interest-rate decision.

What’s happening

The Dow Jones Industrial Average

rose 367 points, or 1.2%, to 32,229.

The S&P 500 index

gained 29 points, or 0.8%, to 3,946.

The Nasdaq Composite

rose almost 10 points, or less than 0.1%, to 11,640 as it toggled between gains and losses.

The S&P 500 and Nasdaq Composite both gained ground last week despite the continued banking upheaval, while the Dow suffered a second straight weekly loss.

What’s driving markets

UBS Group’s

purchase of its beleaguered Swiss peer Credit Suisse
a deal forced by the country’s regulators and finalized late Sunday in a bid to stave off a further deterioration in confidence the global banking system, appeared to get a favorable reception from investors.

“Some of the news over the weekend cleared the deck of concerns over Credit Suisse falling into abyss or having to be rescued by the government,” said James Demmert, chief investment officer at Main Street Research, a New York City-based firm with $2 billion in assets under management.

And while upheaval in the banking sector isn’t welcome, it is a sign that the Fed’s yearlong tightening of monetary policy is beginning to significantly squeeze financial conditions, which could be an important turning point in the battle to bring down inflation, Demmert told MarketWatch in a phone interview.

The Fed, meanwhile, faces a dilemma at its policy meeting on Wednesday as it tries to balance its inflation fight against worries over the stability of the financial system.

Read: The Fed will either pause or hike interest rates by 25 basis points. What are the pros and cons of each approach?

Fed-funds futures traders, who earlier this month had braced for a rate hike of 50 basis points, or half a percentage point, now see a 23.2% chance that policy makers leave rates unchanged on Wednesday and a 76.8% chance of a 25-basis-point, or quarter-point, increase.

See: Traders see growing chance of Fed rate hike in May, pause or cuts thereafter

“The Fed is between a rock and hard place when it comes to trying to bring down inflation by hiking rates and not putting undue pressure on the banking system,” Gennadiy Goldberg, senior U.S. rates strategist at TD Securities, said via phone. “I think they try to break both into two separate categories, by gradually hike rates while offering support to the banking system through its new lending program.”

Also read: What’s at stake for stocks, bonds as Federal Reserve weighs bank chaos against inflation fight

Shares of First Republic Bank

saw renewed pressure, tumbling another 35% on Monday after the troubled bank had its credit rating slashed deeper into junk territory over the weekend. S&P Global Ratings said last week’s $30 billion rescue package doesn’t solve the bank’s “substantial business, liquidity, funding and profitability challenges.” First Republic shares have plunged 87.7% this year.

But other regional banks were holding their own, with the S&P Regional Banking exchange-traded fund

up 2.4%. The ETF remains down around 27% for the month.

The dollar, which often rallies at times of global market anxiety, was softer versus major rivals, reflecting recent drops in short-term Treasury yields

prior to Monday as traders increased bets that the Fed will have to leave interest rates unchanged after Wednesday. The ICE U.S. dollar index
a measure of the currency against a basket of six major rivals, was off 0.4%.

Companies in focus Inc.

shares dropped 2.5% after the company announced another 9,000 layoffs over the next few weeks. The move primarily affects Amazon Web Services, People Experience and Technology Solutions, advertising and Twitch.

Shares of New York Community Bancorp Inc.

jumped 30.4%. On Sunday, the company’s Flagstar Bank subsidiary said it had acquired about $38 billion in assets of the failed Signature Bank and was taking over all of its branches, prompting Wedbush to upgrade the stock to outperform from neutral.

Foot Locker Inc.

shares fell 4.1% after the sneaker and athletic-wear retailer reported fourth-quarter results that beat expectations but forecast a drop in sales.

— Jamie Chisholm contributed to this article.

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