(Bloomberg) — The positive impact from U.S. regulators’ overnight support actions in the banking system evaporated quickly Monday morning, with stocks signaling the fallout from the event was far from over.
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S&P 500 futures erased earlier gains and traded little changed, while Nasdaq futures pared gains and the Cboe Volatility Index edged higher, hitting its highest level since late October. Turmoil continued to surround First Republic Bank, whose shares plunged more than 60% in US premarket trading even as the Silicon Valley bank attempted to calm concerns about its liquidity following the failure. PacVest Bancorp lost more than 30%, while Columbia Banking System Inc fell nearly 5%.
Buckling stocks highlighted that even after emergency measures by US regulators following the collapse of a Silicon Valley bank, including a new backstop for banks, investors remained on edge that more seizures were possible. Broadly speaking, government actions supported the markets, although overnight gains began to fade quickly during the London morning. The latest crisis poses risks to the strong rally seen in US and European stocks since October.
“The market has been shaken by recent events and the positive mood may not return in the short term, so I would expect more weakness and more testing from the market eventually, for some leveraged positions and illiquid assets,” Alberto Tochio, a portfolio manager he said. Kairos Partners. “The next victim will be sought and the prospect of a recession will increase in the coming weeks.”
European shares fell the most since mid-December amid a slide in banking shares after HSBC Holdings Plc agreed to buy the UK branch of the Silicon Valley bank. The biggest decliners included Commerzbank AG, Bawag Group AG and Banco BPM SpA. Credit Suisse Group AG slumped more than 12%. Italy’s FTSE MIB index underperformed other regional benchmarks due to its greater exposure to banks.
“After the liability-driven investment fund crisis in autumn 2022, we see this as another episode where parts of the financial system are affected by an oversight of accommodative central bank policy,” said Benjamin Goye, analyst at Deutsche Bank. “
While US regulators introduced a new backstop for banks that Federal Reserve officials said was large enough to protect the nation’s deposits, the surprise announcement of the closure of Signature Bank of New York reminded investors that further turmoil was still possible, at least among regional banks. A senior US Treasury official said some institutions had similar issues to the failed Silicon Valley bank.
Most of the big US banks also erased earlier gains in US premarket trading, along with JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co.
Haig Bathgate at Atmos Investments said: “We are seeing a liquidity withdrawal, the classic thing you would expect after a credit event like what’s happening in SVB.” “People get scared, reduce exposure to equity and move to government bonds. They are wondering if anyone else will be in this situation because these things don’t happen alone.
Wells Fargo strategists, including Christopher Harvey, said in a note that government intervention had managed to stem deposit losses, but deposit migration to big banks could put pressure on some lenders. Harvey said he is no longer a risk buy and sees Tuesday’s CPI print as a wild card.
US stocks plunged late last week after Silicon Valley banks suddenly crashed in the biggest such event since the global financial crisis. The Fed’s aggressive tightening campaign has raised interest rates, causing some banks to hold long-term bonds, which have fallen in value at the same time, raising their funding costs.
“I don’t think the whole system is financially unstable, certainly given the perceived underestimation of systemic risk,” said Susannah Streeter, head of money and markets, Hargreaves Lansdowne, in a Bloomberg TV interview. “But I think what you’re seeing is that this risk averse nature is really widespread and there’s renewed concern that higher interest rates are being pushed higher for a longer period of time and that has consequences.”
“I really think what happened this morning is that investors have woken up to the fact that a very serious situation has been averted and I think the seriousness was really underestimated,” she said. .
As a result of the latest turmoil, Goldman Sachs Group Inc. U.S. economists said they no longer expect the Fed to raise rates next week.
“The market is likely to remain very cautious regardless of the steps regulators take,” said Marija Weitman, senior multi-asset strategist at State Street Global Markets. “It is a difficult position the Fed is in, on the one hand it needs to go hiking to contain inflation, but it also needs to protect the financial system. Feels like a lose-lose situation for the Fed and the market. It happens.
(An earlier version of the story corrected the spelling of HSBC in the fifth paragraph)
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