U.S. markets sink and recover, while Europe dives
Markets shuddered Wednesday on worries about a spreading banking crisis and how badly it will hit the economy as stocks and bond yields fell on both sides of the Atlantic.
The S&P 500 sank as much as 2.1% before ending the day with a loss of 0.7%, while markets in Europe fell more sharply as shares of Switzerland’s Credit Suisse Group AG dropped to a record low. The Dow Jones Industrial Average lost 280 points, or 0.9%, after dropping as much as 725 points. The Nasdaq composite rose 0.1% after erasing a steep decline.
Markets trimmed their losses toward the end of the day as the Swiss National Bank said it could provide some assistance to Credit Suisse “if needed.”
But that came only after a steep drop for Credit Suisse rattled investors worldwide. Its shares in Switzerland sank 24.2% after reports its top shareholder won’t pump more money into its investment. The bank has been fighting troubles for years, including losses it took related to the 2021 collapse of investment firm Archegos Capital.
“They’ve had issues,” said Anthony Saglimbene, chief market strategist at Ameriprise. “It’s just coming at a time when there’s more uncertainty and there’s less confidence in the banking system.”
Wall Street’s harsh spotlight has intensified across the banking industry recently on worries about what will crack next after the second- and third-largest bank failures in U.S. history over the past week. Stocks of U.S. banks tumbled again Wednesday after enjoying a brief, one-day respite Tuesday.
The heaviest losses were focused on smaller and midsize banks, which are seen as more at risk of having customers try to pull their money out en masse. Larger banks also fell, but not by quite as much.
First Republic Bank sank 21.4%, a day after soaring 27%. JPMorgan Chase & Co. slid 4.7%.
Many analysts are quick to say the current weakness for banks looks nowhere near as bad as the 2008 crisis that torpedoed the global economy. But worries are nevertheless rising that pain spreading through the banking system will spark a downturn.
“When you have worries about contagion and a financial crisis, there is increasing risk of a global recession,” Saglimbene said, pointing to the first drop in the price of U.S. crude oil below $70 per barrel since late 2021. A weaker economy is expected to burn less fuel.
“The regional banks are so important to small businesses, midsize businesses” by providing loans, he said. “They’re a centerpiece of the economy.”
Much of the damage for banks is seen as the result of the Federal Reserve’s fastest barrage of increases to interest rates in decades. The Fed has pulled its key overnight rate to a range of 4.50% to 4.75%, up from virtually zero at the start of last year, in hopes of driving down painfully high inflation.
Higher rates can tame inflation by slowing the economy, but they raise the risk of a recession. They also hurt prices for stocks, bonds and other investments. That latter factor was one of the issues hurting Silicon Valley Bank, which collapsed Friday, because high rates forced down the value of its bond investments.
The Fed’s fusillade of rate increases over the year have shocked the system after years of historically easy conditions. In his annual letter to investors, BlackRock CEO Larry Fink pointed to prior eras of rising rates that led to “spectacular financial flameouts,” such as the yearslong savings and loan crisis.
“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming,” he wrote.
Some of this week’s wildest action has been in the bond market, where traders are rushing to guess what all the chaos will mean for future Fed action. On one hand, stress in the financial system is expected to push the Fed to hold off on raising rates again at its meeting next week, or at least refrain from the larger rate increase it had been potentially signaling.
On the other hand, inflation remains high. While taking it easier on interest rates is expected to give more breathing space to banks and the economy, the fear is such a move by the Fed will also give inflation more oxygen.
Weaker-than-expected economic reports released Wednesday likely allayed some of those worries. One showed inflation at the wholesale level slowed by much more last month than economists expected. It’s still high at 4.6% versus a year earlier, but that was better than the 5.4% that was forecast.
Other data showed that U.S. spending at retailers fell by more than expected last month. Such data is expected to raise worries about a recession but likely also takes some pressure off inflation in the near term.
That caused the yield on the two-year Treasury to plummet. It tends to track expectations for the Fed, and it dropped to 3.89% from 4.25% late Tuesday. That’s a large move for the bond market. The twoyear yield was above 5% just a week ago, at its highest level since 2007.
In Europe, indexes tumbled on weakness from banks. France’s CAC 40 dropped 3.6%, and Germany’s DAX lost 3.3%. The FTSE 100 in London fell 3.8%.
On Wall Street, companies in the oil and gas business also had some the sharpest stock drops. Helping to cushion the blow were gains for several tech stocks. They have had their own struggles recently, but they tend to benefit from lower interest rates.
All told, the S&P 500 fell 27.36 points to 3,891.93. The Dow lost 280.83 to 31,874.57, while the Nasdaq rose 5.90 to 11,434.05.