Bank stocks fell on Monday on concerns about what could be next to swing after the second and third largest bank failures in the history of the United States. But much of the rest of the market rose on hopes that the bloodshed will force the Federal Reserve to ease its economy-shaking interest rate hikes.
The S&P 500 fell 6 points, or 0.2%, after choppy trading, where it went from an early loss of 1.4% to a midday gain of nearly as much. The Dow Jones Industrial Average fell 90 points, or 0.3%, while the Nasdaq composite rose 0.4%.
The steepest declines again came from banks and other financial companies. Investors fear that a relentless rise in interest rates aimed at controlling inflation is approaching a tipping point and risks weakening the banking system.
The market as a whole held up better as expectations mounted that all the chaos meant the Fed would have to take longer on its economy-shaking interest rate hikes.
Government response
The US government announced a plan end of Sunday was aimed at consolidating the banking sector following the collapse of Bank of Silicon Valley And Signature Bank since Friday.
President Biden sought Monday to reassure americans that they can have confidence in the American banking system following the Silicon Valley Bank collapse and allay any concerns about the fallout from its brutal failure.
“Americans can have confidence in the security of the banking system,” Biden said in brief remarks from the White House. “Your deposits will be there when you need them. Small businesses across the country that have deposit accounts at these banks can breathe easier knowing they can pay their employees and pay their bills, and their employees who are working hard can breathe easier because Good.”
The greatest pressure is on regional banks one or two rungs below the size of the massive, “too big to fail” banks that contributed to the downfall of the economy in 2007 and 2008. First Republic shares plunged 66.3% even after the bank said on Sunday it had bolstered its finances with cash from the Federal Reserve and JPMorgan Chase.
Big banks, which were repeatedly stress-tested by regulators after the 2008 financial crisis, weren’t down as much. JPMorgan Chase fell 1.8% and Bank of America 5.8%.
“So far, it appears that potential problem banks are few in number and, more importantly, do not extend to so-called systemically important banks,” ING analysts said.
Interruption of transactions in some regional banks
Shares of other regional banks also took a hit on Monday, including Zions, Pacific West and Western Alliance. More than a dozen regional banks have had their trade stopped Monday after prices continued to fall following the seizure by regulators of Silicon Valley Bank (SVB) and Signature Bank of New York.
Bank of America analysts said they “expect volatility in regional bank stocks to remain challenging in the near term as investors recalibrate the risk-reward ratio” in the coming days.
“The events of the past few days are likely to compound the funding cost pressure the industry was already facing,” they said in a report. “No bank is immune, but this pressure will likely be more pronounced among banks with a larger number of rate-sensitive customers.”
Regional lenders that saw share prices fall on Monday are unlikely to slump like the SVB did because “most of the larger regional banks have much more diversified deposit bases,” said Solita Marcelli, chief financial officer. investments at UBS, in a research note.
Among the few investments that rose in price was gold, as investors sought out anything that seemed safe. It rose 2.3% to $1,910.50 an ounce.
Treasuries prices also rose on both demand for something safe and expectations of an easier Fed. This in turn pushed their yields lower, and the 10-year Treasury yield plunged to 3.51% from 3.70% on Friday night. This is a major change for the bond market. It was above 4% at the start of the month.
The two-year yield, which moves more in line with Fed expectations, fell even more breathtakingly. It fell to 4.12% from 4.59% on Friday.
Call for emergency rate cuts
Some investors are calling on the Fed to make emergency interest rate cuts quickly to stem the bleeding. The broader expectation, however, is that the Fed will likely pause or slow its increases.
Traders are betting on nearly a four-in-five chance that the Fed will raise its overnight rate by 0.25 percentage points later this month at its next meeting. They are also now betting on a 21% chance of it holding up, according to CME Group.
That’s a sharp turnaround from early last week, when many traders were betting on the Fed reaccelerating its hikes and rising 0.50 percentage points on persistently high and stubborn inflation.
“At this point, depending on the reactions of the financial markets and the possible fallout on the overall economy, we do not rule out that the bull cycle may even be over and that the next decision by Fed officials may be lower and not superior,” said Kevin Cummins, chief U.S. economist at NatWest.
Fears of a Fed-induced recession
Higher interest rates can lower inflation by slowing the economy, but they increase the risk of a recession later. They also hit stock prices, as well as bonds already in investors’ portfolios.
This latter effect is one reason for concern about the banking system. The Fed began raising interest rates almost exactly a year ago, and it instituted the strongest wave in decades. Its key policy rate is now in a range of 4.50% to 4.75%, up from virtually zero.
This has hurt the investment portfolios of banks, which often put their cash in treasury bills because they are considered one of the safest investments in the world.
Global impact
The collapse of Silicon Valley Bank reverberated around the world.
In London, the government arranged the sale of Silicon Valley Bank UK Ltd., the British branch of the California bank, for the nominal sum of one pound sterling, or about $1.20.
Although the bank is small, with less than 0.2% of UK bank deposits according to central bank statistics, it has played an important role in funding the tech and biotech startups the UK government relies on to fuel growth. economic.
Germany’s financial regulator, BaFin, on Monday banned asset sales and payments by the German branch of Silicon Valley Bank and imposed a moratorium, effectively closing it to customer transactions.
The US Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said on Sunday that all Silicon Valley Bank customers will be protected and have access to their funds and announced measures to protect the bank’s customers and prevent further bank runs.
“Not the end of the world”
“This situation is something to watch, but it is not the onset of the next financial crisis,” Brad McMillan, chief investment officer of the Commonwealth Financial Network, said in a note, highlighting the government’s swift and aggressive action.
“While we can certainly expect market turbulence – and we are seeing it this morning – the systemic effects will be limited,” he said. “We are not ready for a repeat of the Great Financial Crisis. It is not the end of the world.”
Banking industry analysts also expressed confidence in the safety of the banking system as a whole.
“We believe the events are not expected to have broader and meaningful implications for the economy and are not a sign of systemic risks to the banking sector,” John Canavan, principal analyst at Oxford Economics, told investors Monday.
Regulators Friday shut down Silicon Valley bank as investors withdrew billions of dollars from the bank in hours, marking the second-largest US bank failure behind the 2008 failure of Washington Mutual. They also announced on Sunday that New York-based Signature Bank was foreclosed after it became the third-largest bank to fail in US history.