(Bloomberg) — Risk assets were hurt as fresh turmoil at Credit Suisse Group AG sparked a frenzy for cover days after the collapse of some US regional banks, reviving memories of the 2008 global financial crisis and fueling speculation that major central banks will have to slam on the brakes when tightening to prevent a harder economic landing.
Most read by Bloomberg
Nervous traders pressed the sell button on shares as a slump in the Swiss lender’s shares sparked a sell-off in the financial industry that even included big names like JPMorgan Chase & Co. and Wells Fargo & Co. First Republic Bank later led a defeat at regional US competitors after being scrapped by two big lenders. About 85% of S&P 500 stocks fell, while the drop in European stocks exceeded 3% at one point. Oil fell to a 15-month low.
Rising volatility in financial markets pushed Wall Street’s so-called fear meter to its highest level since October. As investors rushed to safe havens, gold recouped losses and the dollar rallied against all other developed markets except the Japanese yen.
Global bond yields tumbled as growing concerns about financial stability prompted traders to dump their bets on further rate hikes and start pricing cuts by the Federal Reserve. They have priced in a more than 100 basis point fall in US interest rates by the end of the year and downgraded the likelihood of further tightening by the Bank of England and the European Central Bank.
The cost of credit derivatives linked to Credit Suisse is skyrocketing to levels reminiscent of the global financial panic after the lender’s largest shareholder said it did not want to increase its stake beyond current levels. The moves are compounded by banks rushing to buy protection against a possible failure of the Zurich-based company to reduce their counterparty risk on deals, according to people familiar with the matter.
The story goes on
Read: Treasury Department is reviewing US financial sector exposure to Credit Suisse
The renewed bout of banking turmoil prompted some worrying comments from prominent Wall Street voices.
When Credit Suisse crashed, economist Nouriel Roubini — known as “Dr. Doom” – said troubled lender could be “too big to bail out”. BlackRock Inc.’s Larry Fink, noting that the banking crisis could be getting worse, has voiced concerns about cracks in the financial system that had formed during more than a decade of easy money and low interest rates. Bridgewater Associates’ Ray Dalio expects problems to increase due to debt and credit market contractions, saying the recent Silicon Valley bank collapse is just a “canary in the coal mine”.
“Are the dominoes starting to fall?” Fink, chief executive officer of the world’s largest wealth manager, said in a letter on Wednesday. “It’s too early to know how widespread the damage is.”
JPMorgan Asset Management Chief Investment Officer Bob Michele warned of an economic hard landing as the banking turmoil hit the financial markets.
He now expects the Fed to halt rate hikes next week and says a recession is “inevitable” and that the best investment strategy right now is to stick with quality bonds. Michele expected the full US Treasury yield curve to drop as low as 3% by August, but he balked at predicting the end of a cycle of interest rate hikes. The 10-year rate is currently around 3.4%.
Financial Crisis 2.0
This is not to say that everyone is buying the idea of a “financial crisis 2.0” at this stage.
Lisa Shalett of Morgan Stanley’s asset management division was about to embark on the latest mega bear case for equities – namely that the collapse of three American banks would be a prelude to a crisis like the one that rocked the world economy in 2008 abyss fell.
She says the collapse of some regional lenders was largely due to poor risk management at a time when the Fed is aggressively tightening monetary policy to slow the economy. While more banks are likely to fall, Shalett believes the threat to the broader financial industry and economy is limited.
“Remember, the great financial crisis was a lot about credit risk between counterparties,” she told Bloomberg Television. “This is less about an immediate infection.”
Read: Pimco warns all cash isn’t king as SVB debacle exposed
Important events this week:
-
Eurozone interest rate decision, Thursday
-
US housing starts, initial jobless claims, Thursday
-
Janet Yellen appears before the Senate Finance Committee on Thursday
-
University of Michigan Consumer Sentiment, Industrial Production, Conference Board Headline Index, Friday
Some of the key movements in the markets:
Shares
-
The S&P 500 was down 1.3% at 1:57 p.m. New York time
-
The Nasdaq 100 fell 0.3%
-
The Dow Jones Industrial Average fell 1.5%
-
The MSCI World Index fell 1.6%
currencies
-
The Bloomberg Dollar Spot Index rose 1%
-
The euro fell 1.7% to $1.0555
-
The British pound fell 0.9% to $1.2053
-
The Japanese yen rose 0.9% to 133.02 per dollar
cryptocurrencies
-
Bitcoin fell 1.1% to $24,369.81
-
Ether fell 4.1% to $1,635.26
Bind
-
The 10-year government bond yield fell 23 basis points to 3.46%
-
The 10-year German government bond yield fell 29 basis points to 2.13%
-
The 10-year UK government bond yield fell 17 basis points to 3.32%
raw materials
-
West Texas Intermediate Crude fell 5.7% to $67.26 a barrel
-
Gold futures were up 1% to $1,929.10 an ounce
This story was created with the support of Bloomberg Automation.
–With the support of Robert Brand.
Most Read by Bloomberg Businessweek
©2023 Bloomberg LP
Comments are closed.