© Reuters. Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US, March 20, 2023. REUTERS/Brendan McDermid

By Stephen Culp

NEW YORK (Reuters) – Wall Street advanced on Tuesday as widespread fears over liquidity in the banking sector subsided and investors turned their focus to the Federal Reserve, which has convened for its much-anticipated two-day policy meeting

All three major US stock indexes were resolutely green, with smallcaps, energy and financials enjoying the most sizable gains.

A one-two punch of regional bank failures last week, followed by the rescue of First Republic Bank (NYSE:) 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, surging 3.6%, and building on Monday’s reversal. Still, despite its recent resurgence, the S&P Banks index has lost nearly 18% of its value just this month.

Both the SPXBK and the KBW Regional Banking index have set a path for their biggest one-day percentage jumps in months.

“It’s a bit of a rebound from the sell-off associated with issues surrounding the regional banks,” said Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Connecticut. “So much effort has been put into ending the confidence crisis, by the FDIC, the Treasury and the Fed, that there’s a renewed interest in the stock market.”

Treasury Secretary Janet Yellen, in prepared remarks before the American Bankers Association, said the US 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 is in a no-win situation,” Pavlik added. “The Fed is doing their job by raising rates to battle inflation and they need to continue to do that, but if they do it creates more of a problem with banks that are teetering.”

Financial markets have now priced in an 86.4% likelihood of a 25 basis-point rate hike, and a 13.6% 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 existing home sales, blasting past expectations and snapping a 12-month losing streak.

At 2:08 pm EDT, the rose 109.46 points, or 0.34%, to 32,354.04, the gained 27.39 points, or 0.69%, to 3,978.96 and the added 117.28 points, or 1%, to 11,792.82.

Among the 11 major sectors in the S&P 500, seven were in positive territory, with energy and financials out front.

Shares of First Republic Bank surged 46.4%, setting a course for their biggest-ever one-day percentage jump as JPMorgan (NYSE:) 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 (NYSE:) Bancorp leaped by 16.8% and 16.8%, respectively.

Tesla (NASDAQ:) Inc rose 6.7% after the electric automaker appeared on track to report one of its best quarters in China, according to car registration data.

Advancing issues outnumbered declining ones on the NYSE by a 3.01-to-1 ratio; on Nasdaq, a 2.52-to-1 ratio favored advancers.

The S&P 500 posted 5 new 52-week highs and 2 new lows; The Nasdaq Composite recorded 41 new highs and 89 new lows.

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