by Bank stocks fell Monday on worries about what might come next after the coup second and third largest bank failures in US history. But much of the rest of the market rallied on hopes that the bloodletting will force the Federal Reserve to ease its economy-shocking rate hikes.
The S&P 500 fell 6 points, or 0.2%, after the stick trade, where it plummeted from an early 1.4% loss to a midday gain of almost as much. The Dow Jones Industrial Average fell 90 points, or 0.3%, while the Nasdaq Composite rose 0.4%.
Banks and other financial companies were once again the strongest slumps. Investors are concerned that a relentless rise in interest rates, designed to keep inflation under control, is nearing a tipping point and could crack the banking system.
The broader market fared better as expectations mounted that all the chaos meant the Fed would have to take it easy on its economy-snapping rate hikes.
government response
The US government announced a plan Late Sunday should support the banking industry after the collapse of Silicon Valley Bank And signature bank since Friday.
President Biden tried to do that on Monday reassure Americans that they can have confidence following the US banking system Collapse of the Silicon Valley Bank and quell any concerns about the consequences of his sudden failure.
“Americans can have confidence that the banking system is safe,” Biden said in brief remarks from the White House. “Your insoles are there when you need them. Small businesses across the country that have accounts with these banks can breathe easier knowing they can pay their workers and pay their bills, and their hard-working employees can breathe easier too.”
Most of the pressure is on regional banks, which are a notch or two smaller than the massive, too-big-to-fail banks that contributed to the economy’s decline in 2007-08. Shares in the First Republic plunged 66.3% even afterward. The bank said Sunday it had bolstered its finances with cash from the Federal Reserve and JPMorgan Chase.
Huge banks, which were repeatedly stressed by regulators after the 2008 financial crisis, weren’t as badly hit. JPMorgan Chase fell 1.8% and Bank of America fell 5.8%.
“So far it seems that the potential problem banks are few and, above all, do not extend to the so-called systemically important banks,” said the analysts at ING.
Trading was suspended at some regional banks
Shares in other regional banks also took a hit Monday, including Zions, Pacific West and Western Alliance. More than a dozen regional banks had theirs Trading was halted on Monday after prices continued to fall freely after regulators seized Silicon Valley Bank (SVB) and New York’s Signature Bank.
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 trade-off in the coming days.”
“The events of the past few days are likely to add to the funding cost pressures that the industry was already facing,” a report said. “No bank is immune, but these pressures will likely be most pronounced at banks with a larger mix of interest rate-sensitive customers.”
Regional lenders, which saw share prices fall on Monday, are unlikely to collapse like SVB because “most large and regional banks have much more diversified deposit bases,” Solita Marcelli, chief investment officer at UBS, said in a research note.
Among the few assets to rise in price was gold as investors looked for whatever seemed safe. It rose 2.3% to $1,910.50 an ounce.
Treasury prices also shot up on both demand for something safe and expectations of a looser Fed. This, in turn, pushed their yields lower, with the 10-year Treasury yield plummeting to 3.51% from 3.70% late Friday. This is an important move for the bond market. Earlier this month it was above 4%.
The two-year yield, which is more in line with Fed expectations, had an even more stunning fall. It fell to 4.12% from 4.59% on Friday.
Call for emergency rate cuts
Some investors are urging the Fed to cut interest rates soon in an emergency to stem the bleeding. However, the broader expectation is that the Fed is likely to pause or slow down its hikes.
Traders are betting on a nearly four-in-five chance that the Fed will hike its key overnight rate by 0.25 percentage point at its next meeting later this month. They are also now betting on a 21% chance that it will remain stable, according to CME Group.
That’s a sharp reversal from early last week, when many traders were betting the Fed would accelerate rate hikes again, increasing them by 0.50 percentage point because inflation has been so stubbornly stubborn.
“At this point, depending on the reactions in financial markets and eventual impact on the broader economy, we would not rule out that the rate hike cycle could even be over and that the next move by Fed officials could be lower, not higher.” said Kevin Cummins, chief US economist at NatWest.
Fears of Fed-induced recession
Higher interest rates can pull down inflation by slowing the economy, but they increase the risk of a recession later. They also hit prices for stocks and bonds already in investors’ portfolios.
The latter effect is one of the reasons for concerns about the banking system. The Fed began raising rates almost exactly a year ago, ushering in the sharpest excitement in decades. Its key overnight rate is now in a range of 4.50% to 4.75%, an increase from practically zero.
This has hurt the investment portfolios of banks, which often park their money in government bonds because they are considered one of the safest assets in the world.
global impact
The collapse of the Silicon Valley bank resonated around the world.
In London, the government arranged the sale of Silicon Valley Bank UK Ltd., the UK arm of the California bank, for the nominal amount of one pound, or about $1.20.
Although the bank is small, accounting for less than 0.2% of UK bank deposits according to central bank statistics, it has played a huge role in funding tech and biotech startups that the UK government is counting on to spur economic growth.
Germany’s financial regulator BaFin on Monday banned the sale and payment of assets by Silicon Valley Bank’s German branch and imposed a moratorium, effectively closing it to trading with customers.
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 steps aimed at protecting the bank’s customers and preventing further bank runs.
“No end of the world”
“This situation is something to keep an eye on, but it is not the beginning of the next financial crisis,” said Brad McMillan, chief investment officer of the Commonwealth Financial Network, in a statement, noting the government’s swift and aggressive action.
“While we can certainly expect market turmoil – and we’re seeing it this morning – the systemic impact will be limited,” he said. “We are not prepared for a repeat of the Great Financial Crisis. This is not the end of the world.”
Banking industry analysts also expressed confidence in the banking system as a whole being safe.
“We believe events should not have a significant broader impact on the economy and are not a sign of systemic risk for the banking sector,” John Canavan, senior 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 US bank failure after the 2008 collapse of Washington Mutual. They also announced Sunday that New York-based Signature Bank was seized after becoming the third-biggest bank in US history to fail.
