S&P 500 rises and yields bounce as deposit insurance talk amid bank meltdown

• Market sentiment remains cautiously optimistic amid mixed news on the banking and Federal Reserve crisis.
• Bloomberg reports that US authorities are discussing how to insure all bank deposits under the FDIC.
• Doubts about insurance coverage and hawkish expectations from the Fed allowed yields to rally before the Japanese holidays limited bond moves in Asia.

Market sentiment remains mixed into the early hours of Tuesday as the Japanese holiday caps returns, while stock futures try to celebrate hopes of a deposit guarantee amid the looming banking crisis.

Portraying the mood, S&P 500 futures mark slight gains around 3,990, after refreshing to an eight-day high, while Treasury yields remain subdued but maintain the previous day’s rebound from multi-day lows. That being said, 10-year and 2-year US Treasury yields rebounded the previous day from the lowest levels since September 2022.

“US officials are looking at ways they could temporarily extend Federal Deposit Insurance Corporation (FDIC) coverage to all deposits, a move called for by a coalition of banks they argue is necessary to avoid a potential financial crisis.“, reported Bloomberg. The story quotes anonymous people with knowledge of the conversations: “Staff at the Treasury Department are reviewing whether federal regulators have sufficient emergency authority to temporarily insure deposits above the current limit of $250,000 in most accounts without the formal consent of a deeply divided Congress”.

It should be noted that fears about the inability of the FDIC to cover the deposits of US banks, due to limited funds in the reserve, join doubts over UBS-Credit Suisse deal to test risk appetite.

Standard & Poor’s analysts consider it unlikely that some US bank failures prevent policy makers from doing the job of taming inflation, Reuters reported early on Tuesday. The global rating agency also mentioned that the decision to cancel Credit Suisse’s AT1 bonds may contribute to a higher cost of capital for banks. In the same vein, a senior Swiss lawmaker warned on Monday that “the UBS-Credit Suisse merger is a huge risk.”

That said, the latest reading from the CME’s FedWatch tool shows that the probability of seeing a 0.25% Fed rate hike on Wednesday is approaching 75%, up from 65% last week.

It is worth noting that the sluggish markets allow the dollar to lick its wounds near the lowest level in five weeks, while the price of gold renews the bullish momentum after pulling back from the yearly high reached the day before.

Looking ahead, data from the US housing sector could add to the catalysts of risk to drive market movements in the short term. However, the focus will be on Wednesday’s Federal Open Market Committee (FOMC) monetary policy meeting.