Bank stocks fell on Monday on worries about what could happen after the collapse failure of the second and third largest banks in US history. But much of the rest of the market rallied on hopes that the bloodbath would force the Federal Reserve to ease interest-rate hikes that would cripple its economy.
The S&P 500 was down 6 points, or 0.2%, in after-hours trading, where it rallied from an early loss of 1.4% to gain nearly as much during the day. The Dow Jones Industrial Average fell 90 points, or 0.3%, while the Nasdaq Composite gained 0.4%.
The sharpest declines again came from banks and other financial companies. Investors worry that the relentless hike in interest rates to control inflation is nearing tipping point and could collapse the banking system.
The broader market fared better because all the chaos meant the Fed had to ease its economy-sapping interest rate hikes.
Government response
US Govt announced the plan Looking to strengthen the banking sector after the decline on Sunday evening Silicon Valley Bank and Signature bank from friday.
President Biden sought on Monday convinces Americans they can rely on the US banking system The Silicon Valley Bank Collapse and allays any concern that it might suddenly fail.
“Americans can rest assured that the banking system is safe,” Mr. Biden said in a brief statement at the White House. “Your deposits will be there when you need them. Small businesses across the country with deposit accounts at these banks can breathe easy knowing they can pay their workers and pay their bills, and their hard-working employees can breathe easy. Good.”
Most of the pressure is on regional banks, a rung or two below the size of the massive, “very large” banks that helped bring down the economy in 2007 and 2008. Even after that, First Republic shares fell by 66.3%. The bank said on Sunday it had bolstered its finances with cash from the Federal Reserve and JPMorgan Chase.
After the financial crisis of 2008, the big banks, which were subjected to repeated stress tests by regulators, did not suffer as much. JPMorgan Chase fell 1.8% and Bank of America fell 5.8%.
“So far, it seems that the potential problem banks are few, and most importantly, they do not spread to the so-called systemically important banks,” say ING analysts.
Trading in some regional banks was suspended
Shares of other regional banks such as Zions, Western Pacific and Western Alliance also took a hit on Monday. More than a dozen regional banks had their own trading was suspended on Monday After regulatory takeovers of Silicon Valley Bank (SVB) and New York Signature Bank, prices continued to free fall.
Analysts at Bank of America said “we expect volatility in regional bank stocks to remain volatile in the short term as investors reexamine risk-reward in the coming days.”
“The events of the past few days are likely to worsen the financing cost pressures the industry has already faced,” they said in a report. “No bank is immune, but this pressure may be more pronounced among banks with a large proportion of rate-sensitive customers.”
Regional lenders, which saw their share prices fall on Monday, are unlikely to fall like SVB because “many large and regional banks have a much more diversified deposit base,” Solita Marcelli, UBS’s chief investment officer, said in a research note.
Gold was among the few investments to rise in price as investors looked for anything that looked safe. It rose 2.3% to $1,910.50 an ounce.
Treasurys also rose on demand for the safe haven and expectations of an easy Fed. That in turn pushed their yields lower, with the 10-year Treasury yield falling to 3.51% from 3.70% late Friday. This is an important step for the bond market. Earlier this month, it was above 4%.
Even more surprising were the two-year yields, which have more bearing on Fed expectations. It fell to 4.12% from 4.59% on Friday.
Call for emergency fare reductions
Some investors are calling for the Fed to cut interest rates urgently to stop the bleeding. However, it is expected that the Fed will delay or slow down its growth.
Traders are betting on a nearly four-in-five chance that the Fed will raise its key interest rate by 0.25 percentage points at its next meeting later this month. According to CME Group, they are now betting on a 21% chance of it being permanent.
That’s a sharp reversal from earlier last week, when many traders were betting the Fed would accelerate its rate hikes and hike by 0.50 percentage points, depending on how sticky inflation has become.
“Given the reactions in financial markets and the downturn in the economy as a whole, we do not rule out the possibility that the hiking cycle may be over and that the next move by Fed officials may be lower, not higher,” he said. NatWest’s US Chief Economist Kevin Cummins.
Fear of a recession caused by the Fed
Higher interest rates can reduce inflation by slowing the economy, but they also increase the risk of a later recession. They also affect the prices of stocks and bonds in investors’ portfolios.
This latter effect is one of the reasons for concern for the banking system. The Fed started raising interest rates exactly one year ago, and it’s the sharpest rate hike in decades. Its prime overnight rate is now effectively 4.50% to 4.75% from zero.
This has hurt the investment portfolios of banks, which often put their cash in Treasurys because they are considered one of the safest investments on earth.
Global impact
The collapse of the Silicon Valley bank shocked the whole world.
In London, the government arranged for the sale of Silicon Valley Bank UK Ltd., the British arm of the California bank, for a nominal sum of one British 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 major role in the UK government’s funding of technology and biotech start-ups that drive economic growth.
Germany’s financial regulator BaFin on Monday banned asset issuance and payments by the Silicon Valley bank’s German branch and imposed a moratorium, effectively shutting it down from dealing with clients.
The U.S. Treasury Department, the Federal Reserve System and the Federal Deposit Insurance Corporation said Sunday that all Silicon Valley bank customers will be protected and have access to their funds, and announced steps to protect bank customers and prevent more bank runs.
“Not the end of the world”
“This situation needs to be monitored, but it is not the start of the next financial crisis,” said Brad McMillan, chief investment officer of the Commonwealth Financial Network, noting the government’s swift and aggressive action.
“While we can expect market turbulence – and we’re seeing it this morning – the systemic effects will be limited,” he said. “We are not ready for a repeat of the Great Financial Crisis. It’s not the end of the world.”
Banking industry experts also expressed confidence that the banking system as a whole is safe.
John Canavan, chief analyst at Oxford Economics, told investors in a note on Monday: “We believe the events should not have a significant wider impact on the economy and are not indicative of systemic risks for the banking sector.”
Regulators on Friday A Silicon Valley bank has closed as investors pulled billions of dollars out of the bank within hours, marking the second largest US bank failure since the 2008 failure of Washington Mutual. They also announced on Sunday that New York-based Signature Bank would be seized after becoming the third-largest bank in US history.
