Global banking stocks were hit with a renewed sell-off on Friday as markets failed to take comfort from the rescue package arranged for First Republic Bank.
Renewed concerns over the health of the banking sector dragged down stocks more broadly, taking the gloss off an early-morning rally following news that First Republic will be shored up by a consortium of banks that will inject $30bn into the lender.
The blue-chip S&P 500 fell 1.1 per cent, while the Nasdaq Composite was 0.8 per cent lower. European markets were also dragged lower amid a further drop in Credit Suisse shares despite the Swiss National Bank’s pledge of liquidity support to the lender earlier in the week.
First Republic’s shares fell 25 per cent in morning trading on Wall Street. Bigger banks suffered smaller declines, with JPMorgan Chase sliding 2.7 per cent and Citigroup down 2.7 per cent. The KBW banks index fell 5.1 per cent.
JPMorgan, Bank of America, Citi and Wells Fargo will each deposit $5bn in the troubled lender. Goldman Sachs and Morgan Stanley will each put in $2.5bn while BNY Mellon, PNC Bank, State Street, Truist Bank and US Bank will deposit $1bn each.
“Despite the ‘most welcome’ gesture from the large banks, the update points to a bank still in the throes of a significant liquidity crunch,” said Jesse Rosenthal, head of US financials research at CreditSights.
In Europe, Credit Suisse gave up early gains to trade 7.5 per cent lower. The Euro Stoxx Bank index, which has already fallen sharply this week, gave up early gains to trade 3.7 per cent lower in the early afternoon.
The broader Stoxx 600 was down 1.4 per cent, while Germany’s Dax fell 1.6 per cent. France’s CAC 40 dipped 1.7 per cent, while the UK’s FTSE 100 was down 1.2 per cent.
“The key problem is that the liquidity support does not resolve [Credit Suisse’s] well-known structural problems and, most importantly, its low profitability . . . The bank has a restructuring plan which aims to address these issues over a three-year period but it is uncertain whether markets will give it that long,” said Andrew Kenningham, chief Europe economist at Capital Economics.
Investors say that the events of the past week could point towards the advent of recession and credit tightening.
“It’s highly unlikely we’ll see a positive scenario, especially taking into account recent events,” said Orla Garvey, senior fixed income portfolio manager at Federated Hermes. “The issue will be if banks pull back from lending, which has historically had a large impact on growth. But that could be avoided if central banks and regulators step up.”
Sovereign debt markets were muted as investors continued to weigh central banks’ appetite to raise interest rates to combat inflation while there was uncertainty in the banking sector.
The European Central Bank on Thursday announced its decision to raise interest rates by 0.5 percentage points but it ditched a previous commitment to keep “raising interest rates significantly at a steady pace”.
Yields on two-year US Treasury bills, which are most sensitive to interest rate expectations, rose 0.08 percentage points to 4.05 per cent and 10-year note yields fell 0.1 percentage points to 3.45 per cent.
Two-year German bond yields fell 0.09 percentage points to 2.47 per cent and 10-year yields were down 0.1 percentage points at 2.14 per cent.
The ECB’s decision has strengthened bets that the Federal Reserve will press forward with a 0.25 percentage point rate increase next week, instead of a pause.
Earlier, Asian markets advanced, having also been dragged down this week by fears of a banking crisis. Japan’s Topix rose 1.2 per cent, South Korea’s Kospi gained 0.7 per cent and Australia’s S&P/ASX 200 was up 0.4 per cent. Hong Kong’s Hang Seng and China’s CSI 300 climbed 1.6 per cent and 0.5 per cent respectively.
In currency markets, the dollar index, a measure of the greenback against six peer currencies, fell 0.2 per cent. The euro rose 0.2 per cent and sterling was up 0.2 per cent.
Brent crude rose 1.4 per cent and its US equivalent West Texas Intermediate gained 1.2 per cent after they slumped on Wednesday to their lowest prices in more than a year.
