Stocks fell on Wednesday amid renewed concerns about the banking sector, although Wall Street more than halved its losses at the closing bell.
The S&P 500 closed down 27 points, or 0.7%, at 3,892. The Dow was down 281, or 0.9%, at 31,875, while the Nasdaq was up slightly on late gains in tech stocks. Treasury yields fell after several reports of a weaker-than-expected economy.
Shares in Switzerland’s Credit Suisse sparked a broad sell-off early Wednesday after falling to new lows. Markets pared some of their losses as the Swiss National Bank said it could provide some help to Credit Suisse if needed.
Later, Credit Suisse said in a statement that it would “exercise its option” to borrow up to 50 billion Swiss francs (about $53.6 billion) from the Swiss National Bank in order to “strengthen its liquidity in advance.”
The Swiss-based Wall Street bank has pulled out after reports that its major shareholder will no longer inject more money into the struggling firm. Officials at the National Bank of Saudi Arabia said they could not increase their investment in Credit Suisse, citing regulatory concerns.
In February, the banking giant reported a fourth-quarter loss of $1.6 billion, after customers pulled $88.3 billion from the bank in the first two weeks of October amid fears of instability following a year of scandal and restructuring, Bloomberg reported. Its loss for the year was $7.9 billion, the largest annual loss since the 2008 financial crisis, according to CNN.
“Credit Suisse is not just a Swiss problem, it’s a global problem,” said Andrew Cunningham, chief European economist at Capital Economics.
“The problems at Credit Suisse raise the question once again whether this is the beginning of a global crisis or just another ‘idiosyncratic’ case,” he said, adding that “it is not the only bank struggling with low profitability in recent years.” . Additionally, given the failures of regional banks in the U.S., “it would be foolish to think there won’t be more problems down the road,” Cunningham said.
Indeed, three recent bank failures in the U.S. have spooked investors, and the Credit Suisse news prompted a sell-off in bank stocks in the U.S. and Europe.
“A Silicon Valley bank collapse in the US is the biggest risk to the financial system since the global financial crisis,” Evgenia Sleptsova, senior EM economist at Oxford Economics, said in a research note. “Although SVB is the 16th largest US bank, markets see it as a possible symptom of similar problems at other banks around the world, many of which have large portfolios of long-dated securities that could face huge losses if sold before maturity. .
“Whirlwind of Negatives”
Confidence in the banking system has been eroded in a matter of days following the failures of Silicon Valley Bank on Friday and Signature Bank on Sunday.
“Wednesday morning’s Credit Suisse event highlights just how unique an industry bank is, whose entire business model depends on the confidence of financial markets,” Vital Knowledge analyst Adam Crisafulli said in a report. “If people think there’s a problem, there will be a problem.”
Deteriorating confidence in the banking system in the US and Europe makes scrutinized credit institutions like Credit Suisse “particularly vulnerable to a negative spiral,” warns Crisafulli, regardless of the firm’s stability.
“Specifically, what happened this morning for Credit Suisse was that the CEO of its largest shareholder ruled out further capital injection for REGULATORY reasons (not due to the credibility of the institution),” he noted.
For banks and regulators, Crisafulli said, finding ways to boost investor confidence is the key to disruption
The selloff mostly affects regional banks
Most of the premarket decliners on the S&P 500 early Wednesday were regional banks, with Zion Bancorp, KeyCorp, Commerce and Regions all down between 5% and 8%. Major banks also lost ground, with Wells Fargo, Bank of America and Citigroup all down 3% to 4%.
Banks struggled for much of the year as fewer people and businesses were able to borrow from high interest rates, part of the Federal Reserve’s goal as it tries to cool the economy and reduce four-decade high inflation.
Investors returned to bond markets on Wednesday, which pushed yields lower again after recovering somewhat the previous day. The 2-year yield fell to 4.05% from 4.25% on Tuesday evening, and the 10-year yield fell to 3.53% from 3.69%.
Stocks rose on Tuesday after the government announced consumer prices slowed down from last month, mostly in line with analysts’ expectations. The data showed core inflation, stripped of volatile energy and food prices to show a clearer trend, was 0.5% in February from a month earlier, up from a 0.4% increase in January. The Fed pays particular attention to core inflation in deciding monetary policy.
Investors fear the Fed’s overreach
Investors fear the Fed may respond to sustained upward pressure on prices by accelerating the pace of interest rate hikes to slow economic activity and inflation.
The Fed faces a dilemma over how to act when banks are under strain after the fastest growth rate in a decade crushed their asset prices.
“The Fed is caught between a rock and a hard place,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
“Inflation met expectations, but combined that with a stark warning that they may need to raise more if inflation trends don’t improve.”
He said the Fed has other tools at its disposal besides raising rates. Among them: The Fed can adjust the rate at which it can reduce its massive pool of bond investments, an action that effectively tightens the screws on the financial system.
President Biden and regulators have tried to convince the public that there are risks and that deposits at other banks are safe.
Later on Wednesday, the government will report on retail sales, giving the Fed more data to chew on before a meeting next week where the central bank will decide whether to raise interest rates for a ninth consecutive time.
In energy markets, the benchmark price of American oil fell by $1,039 to $70.24 per barrel in electronic trading on the New York Mercantile Exchange. The contract traded down $3.47 on Tuesday, hitting $71.33.