Stock markets slumped on Wednesday as investor fears over the health of the banking industry resurfaced and spread around the world, reversing a rally on Tuesday when panic appeared to be pausing.
European markets were hit hard and shares of many of the region’s largest banks fell sharply. Premarket trading in the United States also suggested that much of Tuesday’s gain could be quickly wiped out amid worries about the fallout from the collapse of Silicon Valley Bank and Signature Bank, which have been seized by regulators, after suffering a devastating rush for deposits.
The catalyst in Europe seemed to be Credit Suisse, the failure-prone Swiss bank that has been struggling for years to turn its fortunes, with clients constantly shifting their assets to competing banks. It saw the most notable drop when its shares lost more than 20 percent, marking another all-time low. On Wednesday, the bank’s largest shareholder, Saudi National Bank, ruled out providing more money to Credit Suisse as it struggles with its latest turnaround plan.
The slump in Credit Suisse stock led to temporary halts in trading. Shares in France’s Société Générale and BNP Paribas fell about 10 percent, Germany’s Deutsche Bank fell 8 percent and Britain’s Barclays fell 7 percent. The broad-based Stoxx 600 index fell 2.4 percent, swept away by the banks.
Futures for the S&P 500 were 1.8 percent lower, meaning all gains from the previous day would be reversed at the open. US bank stocks were mixed in premarket trading.
Nervousness was also felt in bond markets, with Treasury yields falling on expectations that the US Federal Reserve could become more cautious about raising interest rates. Stubborn inflation would normally require higher interest rates, but turmoil in the banking system might call for more caution. Higher interest rates raise costs for businesses and were at the root of banks’ pain last week.
“The Fed is crazy if they think they can tighten,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “They will destroy the banking system if they keep thinking like this.”
The two-year Treasury yield, which is particularly sensitive to Fed policy, fell a fifth of a percentage point, a big move for the asset, to just over 4 percent. Futures markets still expect Fed policymakers to hike rates by a quarter point at their next meeting, but they now believe the central bank will start cutting rates in the second half of the year and end rates lower level will set the year as they are now.
A measure of bond market volatility rose to its highest level since 2009, in a sign of the choppy trading conditions faced by traders.
“The US banking system remains resilient and is on solid foundations, with strong capital and liquidity throughout the system,” Federal Reserve Governor Michelle Bowman said at a conference in Hawaii on Tuesday. She added that the Fed’s Board of Governors “continues to closely monitor developments in financial markets and across the financial system.”
The Fed is scheduled to meet next week to set interest rates. The European Central Bank, which also raised interest rates to combat inflation, meets on Thursday.
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