Shares in the US climbed Tuesday as investors hoped that financial sector distress could remain contained.
The S&P 500 rose 1.7%, the Dow Jones Industrial Average added 1.1% and the tech-centric Nasdaq Composite jumped 2.1%.
Trading steadied compared with Monday's stormy session, which brought a deep rout for bank stocks and a rally for government bonds.
Over the past week, the collapse of Silicon Valley Bank and the shutdowns of Signature Bank and Silvergate Capital heaped new fears of financial strain on top of investors' yearlong preoccupation with inflation.
As the anxiety rippling through the banking sector calmed, investors reversed some of their more dire bets from a day earlier. Bank stocks recovered sharply, leading the S&P 500's rise. First Republic Bank, which came under pressure over the weekend, climbed 23%. Charles Schwab gained 12% and KeyCorp was up 5.8%. Zions Bancorp, which has also faced investor scrutiny, fell 4.3% after rising earlier in the day.
On Monday, the bond market had been awash in fear that bank distress would force the Fed to soften its plans for continued interest rate increases, despite inflation still being above target. A flight to the safety of government debt sent the 2 Year Treasury note's yield to a historic decline. The KBW Bank index tumbled 12% as traders worried turmoil would spread among financial institutions.
"The action in regional banks was certainly concerning, but at this point it seems limited to a handful of unique names," said Michael Sheldon, chief investment officer at RDM Financial. Still, he added, further shocks cannot be ruled out.
The relative calm boosted bond traders' confidence that in its meeting next week, the Fed may be able to stick to its guns in its battle against inflation. Consumer-price-index (CPI) data out Tuesday showed that headline prices rose by 6% annually in February, cooling for an eighth consecutive month.
Cindy Beaulieu, chair of asset manager Conning's investment policy committee, said that barring additional bank distress, her team expects a quarter-percentage-point rate increase following the Fed's meeting next week.
United Airlines stock fell 6.6% after the Chicago-based carrier warned that it expects a Q1 loss. Shares of Facebook parent Meta Platforms climbed 5.8% after the company said it would cut an additional 10,000 jobs.