Bank stocks fell Monday on worries about what may be next to topple following the second- and third-largest bank failures in U.S. history. But much of the rest of the market rose on hopes the bloodletting will force the Federal Reserve to take it easier on its economy-rattling hikes to interest rates.
The S&P 500 dipped 6 points, or 0.2%, after whipsaw trading, where it careened from an early loss of 1.4% to a midday gain of nearly that much. The Dow Jones Industrial Average fell 90 points, or 0.3%, while the Nasdaq composite rose 0.4%.
The sharpest drops were again coming from banks and other financial companies. Investors are worried that a relentless rise in interest rates meant to get inflation under control are approaching a tipping point and may be cracking the banking system.
The broader market was holding up better as expectations built that the all the chaos means the Fed would have to take it easier on its economy-rattling hikes to interest rates.
The U.S. government announced a plan late Sunday meant to shore up the banking industry following the collapses of Silicon Valley Bank and Signature Bank since Friday.
President Biden on Monday sought to reassure Americans that they can have confidence in the U.S. banking system following the collapse of Silicon Valley Bank and quell any concerns about the fallout from its abrupt failure.
“Americans can have confidence that the banking system is safe,” Mr. Biden said in brief remarks from the White House. “Your deposits will be there when you need them. Small businesses across the country that deposit accounts at these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills, and their hard-working employees can breathe easier as well.”
The most pressure is on the regional banks one or two steps below in size of the massive, “too-big-to-fail” banks that helped take down the economy in 2007 and 2008. Shares of First Republic plunged 66.3%, even after the bank said Sunday it had strengthened its finances with cash from the Federal Reserve and JPMorgan Chase.
Huge banks, which have been repeatedly stress-tested by regulators following the 2008 financial crisis, weren’t down as much. JPMorgan Chase fell 1.8%, and Bank of America dropped 5.8%.
“So far, it seems that the potential problem banks are few, and importantly do not extend to the so-called systemically important banks,” analysts at ING said.
Trading halted at some regional banks
The stocks of other regional banks also took a hit Monday, including Zions, Pacific West and Western Alliance. More than a dozen regional banks had their trading halted Monday after prices continued to free fall following the seizure by regulators of Silicon Valley Bank (SVB) and New York’s Signature Bank.
Analysts at Bank of America said they “expect regional bank stock volatility to remain challenging in the short run as investors recalibrate the risk-reward” in the coming days.
“The events of the last few days are likely to worsen the funding cost pressure that the industry was already facing,” they said in a report. “No bank is immune, but this pressure will likely be most pronounced among banks with a larger mix of rate sensitive customers.”
Regional lenders that saw falling stock prices Monday are unlikely to collapse the way SVB did because “most large and regional banks have much more diversified deposit bases,” Solita Marcelli, the chief investment officer at UBS, said in a research note.
Among the few investments to climb in price was gold, as investors looked for anything that seemed safe. It rose 2.3% to $1,910.50 per ounce.
Prices for Treasurys also shot higher on both demand for something safe and expectations for an easier Fed. That in turn sent their yields lower, and the yield on the 10-year Treasury plunged to 3.51% from 3.70% late Friday. That’s a major move for the bond market. It was above 4% earlier this month.
The two-year yield, which moves more on expectations for the Fed, had an even more breathtaking drop. It fell to 4.12% from 4.59% Friday.
Call for emergency rate cuts
Some investors are calling for the Fed to make emergency cuts to interest rates soon to stanch the bleeding. The wider expectation, though, is that the Fed will likely pause or slow its increases.
Traders are betting on a nearly four-in-five chance that the Fed will hike its key overnight interest rate by 0.25 percentage points later this month at its next meeting. They’re also now betting on a 21% chance that it will hold steady, according to CME Group.
That’s a sharp turnaround from earlier last week, when many traders were betting on the Fed reaccelerating its hikes and increasing by 0.50 percentage points because of how stubbornly sticky high inflation has been.
“At this point in time, depending on reactions in financial markets and eventual fallout on the overall economy, we wouldn’t rule out that the hiking cycle could even be over and that the next move by Fed officials may be lower not higher,” said Kevin Cummins, chief U.S. economist at NatWest.
Fears of Fed-induced recession
Higher interest rates can drag down inflation by slowing the economy, but they raise the risk of a recession later on. They also hit prices for stocks, as well as bonds already sitting in investors’ portfolios.
That latter effect is one of the reasons for the worries about the banking system. The Fed began hiking interest rates almost exactly a year ago, and it’s instituted the sharpest flurry in decades. Its key overnight rate is now at a range of 4.50% to 4.75%, up from virtually zero.
That has hurt the investment portfolios of banks, which often park their cash in Treasurys because they’re considered among the safest investments on Earth.
The collapse of Silicon Valley Bank has reverberated around the world.
In London, the government arranged the sale of Silicon Valley Bank UK Ltd., the California bank’s British arm, for the nominal sum of one British pound, or roughly $1.20.
While the bank is small, with less than 0.2% of U.K. bank deposits according to central bank statistics, it had a large role in financing technology and biotech startups that the British government is counting on to fuel economic growth.
Germany’s financial regulator, BaFin, on Monday prohibited asset disposals and payments by Silicon Valley Bank’s German branch and imposed a moratorium, effectively shutting it for dealings with customers.
The U.S. Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said Sunday that all Silicon Valley Bank clients will be protected and have access to their funds and announced steps designed to protect the bank’s customers and prevent more bank runs.
“Not the end of the world”
“This situation is something to keep an eye on, but it is not the start of the next financial crisis,” Brad McMillan, chief investment officer for Commonwealth Financial Network said in a note, pointing to 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 set for a rerun of the Great Financial Crisis. This is not the end of the world.”
Bank industry analysts also expressed confidence that the banking system as a whole is safe.
“We believe the events should not have significant broader implications for the economy and are not a sign of systemic risks to the banking sector,” John Canavan, lead analyst at Oxford Economics, told investors in a report on Monday.
Regulators on Friday closed Silicon Valley Bank as investors withdrew billions of dollars from the bank in a matter of hours, marking the second-largest U.S. bank failure behind the 2008 failure of Washington Mutual. They also announced Sunday that New York-based Signature Bank was being seized after it became the third-largest bank to fail in U.S. history.
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