March 14 (Reuters) – US bank stocks jumped higher on Tuesday, recovering somewhat after the collapse of Silicon Valley Bank and Signature Bank prompted sharp selling from investors already worried about the impact of rising interest rates on lenders were.
Contagion concerns had also tumbled banking stocks in Asia and Europe as investors reassessed their risks, despite assurances from US President Joe Biden and other global policymakers that the financial system was safe.
An indicator of euro-zone bank credit risk hit its highest level since mid-July, while rating agency Moody’s downgraded its outlook for the US banking system to negative from stable “to reflect the rapid deterioration in the operating environment.”
Although the VIX volatility index (.VIX), Wall Street’s “fear gauge,” neared a six-month high overnight, US regional bank stocks rallied, with First Republic Bank (FRC.N) gaining 52.7% on the day after hitting a daily record low of $17.53.
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Banking giants Citi (CN), Wells Fargo (WFC.N) and JP Morgan (JPM.N) were also higher.
“If we don’t see any high-profile defaults in the near future, the fears would subside,” said Jack Ablin, chief investment officer at Cresset Capital.
In Europe, where some lenders view less vulnerable, the banking index (.SX7P) initially fell but then rebounded, up 2.7%. It posted its biggest percentage loss in over a year on Monday.
“A key difference between the European and US systems that will limit the impact across the Atlantic is that European banks have lower bond holdings and more stable deposits,” Moody’s said in a statement.
Shares in embattled Credit Suisse (CSGN.S) slid as much as 4.5% to start after saying in its annual report that client outflows had “stabilized at much lower levels but not yet reversed.” but down 1.2% in afternoon trade.
Asian bank stocks extended their declines overnight, with Japanese banks hit hard despite assurances from the Bank of Japan about their capital buffers.
The market turmoil showed that investors’ worries about potential contagion from lenders around the world have not been fully allayed by Biden’s reassurances or US contingency measures to support banks through access to additional funding.
“This is part of the process of turning the knob to tighten financial conditions to ensure we are on track to normalize a world of higher interest rates,” said Edward Pick, co-president of Morgan Stanley , on Tuesday. “But there could well be surprises, there could well be reactions.”
RETHINK PRICES
A furious race to reassess interest rate expectations also rattled markets as investors bet the US Federal Reserve will be dovish on a rate hike next week.
Traders currently see a 50% chance of no rate hike at this meeting, with rate cuts priced in for the second half of the year. Earlier last week, a 25 basis point hike was fully priced in with a 70% probability of 50 basis points.
[1/3] A customer leaves after speaking with FDIC officials at Silicon Valley Bank’s headquarters in Santa Clara, California, March 13, 2023. REUTERS/Brittany Hosea-Small
Euro-zone short-end yields fell again as investors bet on the European Central Bank to moderate its monetary tightening at Thursday’s meeting, with the odds of a Bank of England rate hike next week also falling.
The head of the Italian Banking Confederation, Antonio Patuelli, told Il Corriere della Sera that he hoped that “after the collapse of the SVB, the ECB will think more than the already announced decision to hike rates further”.
Yunosuke Ikeda, chief equity strategist at Nomura Securities, said the shift to much less aggressive Fed rate hike expectations has also softened prospects for an eventual turn in Japan away from ultra-low interest rates.
Analysts say uncertainty continues to haunt the financial sector. Investors are concerned about the health of smaller global banks, the prospect of tighter regulation and authorities’ preference to protect depositors from shareholders.
A wave of customers have asked to move their accounts from smaller lenders to big US banks like JPMorgan Chase (JPM.N) and Citigroup (CN) after the collapse of the SVB, the Financial Times reported.
Biden said Monday his administration’s contingency measures mean Americans can be confident the US banking system is “safe” while pledging tighter regulation after the biggest US bank failure since the 2008 financial crisis.
The regulator FDIC had acted quickly to shut down the New York signature bank SBNY.O and take control of the SVB.
The Republican head of the US House Financial Services Committee also sought to bolster support for the banking system, saying Tuesday that both the FDIC and the Fed had acted within the law. He said he still plans to hold a hearing and review documents, although no date has been announced.
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INVESTIGATIONS
As markets braced themselves for the impact of SVB’s collapse, the Wall Street Journal reported Tuesday that the tech-focused lender is under investigation by the US Department of Justice and the Securities and Exchange Commission (SEC).
Citing people familiar with the matter, the WSJ said investigators were also looking into stock sales made by executives at SVB Financial Group days before SVB’s failure, adding that the Justice Department’s investigation involved the department’s fraud prosecutors in Washington and include San Francisco.
The SEC and a spokesman for the Justice Department in Washington declined to comment. SVB did not immediately respond to a Reuters request for comment.
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Apollo Global Management Inc (APO.N), Blackstone Inc (BX.N) and KKR & Co Inc (KKR.N) have expressed interest in a loan book held by SVB, Bloomberg News reported Tuesday, citing people familiar with the matter are the reason.
The portfolio is seen as an attractive buy and was not a factor in SVB’s demise, she added.
Reporting by Trevor Hunicutt in Washington and Tom Westbrook in Singapore; Additional reporting by Alun John and Sinead Cruise in London, Medha Singh and Mehnaz Yasmin in Bengaluru and Rae Wee in Singapore; Letters from Lincoln Feast, Shri Navaratnam and Alexander Smith; Edited by Elisa Martinuzzi, Catherine Evans and Mark Potter
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