(Bloomberg) — The positive effect from the American regulators’ overnight support actions in the banking system quickly evaporated on Monday morning, with stocks signaling that fallout from the incident is far from over.
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S&P 500 futures erased earlier gains and traded little changed, while Nasdaq futures trimmed their advance and the Cboe Volatility Index spiked, set for the highest since end-October. Turmoil continued to engulf First Republic Bank, whose shares plunged more than 60% in US premarket trading even after the lender moved to try and quell concern about its liquidity after the failure of Silicon Valley Bank. PacWest Bancorp lost more than 30%, while Columbia Banking System Inc. fell about 5%.
The buckling shares highlighted that even after emergency measures by US regulators following the collapse of Silicon Valley Bank, including a new backstop for banks, investors remained on edge that more seizures were possible. Broadly, the government actions bolstered markets, though overnight gains began to quickly fade during the London morning. The latest crisis poses a risk to the strong rally seen in US and European shares since October.
“The market has been shaken by the recent events and the positive mood cannot return in the short term so I would eventually expect more weakness and more scrutiny from the market to some leverage situations and illiquid assets,” said Alberto Tocchio, a portfolio manager at Kairos Partners. “There will be a search for the next victim and the recession probability is set to increase over the next weeks.”
European stocks retreated the most since mid-December amid a drop in banking shares after HSBC Holdings Plc agreed to buy the UK arm of Silicon Valley Bank. Biggest fallers 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 large exposure to banks.
“After the liability-driven investment fund crisis in autumn 2022, we see this is another episode where parts of the financial system are hit by the unwinding of accommodative central bank policy,” said Deutsche Bank analyst Benjamin Goy.
While US regulators introduced a new backstop for banks that Federal Reserve officials said was big enough to protect the nation’s deposits, the surprise announcement that New York’s Signature Bank was being shuttered reminded investors that further turmoil, at least among regional banks, was still possible. A senior US Treasury official said some institutions had issues similar to the failed Silicon Valley Bank.
Most large US banks also erased earlier gains in US premarket trading, with JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. all trading lower.
“We’re seeing a liquidity withdrawal, the classic thing that you’d expect following a credit event like what’s happening at SVB,” said Haig Bathgate at Atomos Investments. “People get scared, reduce exposure to equities and move into government bonds. They’re wondering if anyone else will be in this position as these things don’t tend to happen in isolation.”
Government intervention managed to avert deposit losses, but deposit migration to large banks may keep the pressure on some lenders, Wells Fargo strategists including Christopher Harvey said in a note. Harvey said he wouldn’t buy risk now and sees Tuesday CPI print as a wild card.
US stocks tumbled at the end of last week when Silicon Valley Bank suddenly collapsed in the biggest such incident since the global financial crisis. The Fed’s aggressive tightening campaign has sent interest rates surging, leaving some banks holding long-dated bonds that have plunged in value at the same time their financing costs are surging.
“I don’t think the system as a whole is inherently financially unstable, certainly systemic risk has been considered low,” Susannah Streeter, Hargreaves Lansdown, head of money and markets, said in a Bloomberg TV interview. “But what I think you’re seeing is this risk averse nature really sweeping through and renewed worries just about higher interest rates being elevated for longer and the repercussions of that.”
“I actually think that 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 just underestimated actually,” she added.
As a result of the latest turmoil, Goldman Sachs Group Inc. economists said they no longer expect the Fed to deliver a rate increase next week.
“The market is likely to remain very cautious despite regulators stepping in,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets. “This is a difficult position Fed is in, on the one hand it needs to keep hiking to arrest inflation, but also it needs to protect the financial system. Feels like a lose-lose situation for the Fed and the market.”
(Earlier version of the story corrected the spelling of HSBC in fifth paragraph)
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Source: finance.yahoo.com