Markets sink on bank crisis worries; bond yields plunge

Markets shuddered Wednesday on worries about a spreading banking crisis and how badly it will hit the economy. 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 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 that its top shareholder won’t pump more money into its investment.

Late Wednesday, Credit Suisse arranged to borrow as much as $54 billion from the Swiss National Bank and offered to repurchase debt in a bid to reverse a collapse in market confidence.

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 may 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 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 could 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 would burn less fuel.

The regional banks are important to small and 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 hikes 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 later on. 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 hikes 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 years-long 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 could push the Fed to hold off on hiking rates again at

its meeting next week or at least refrain from the larger rate hike it had been signaling.

On the other hand, inflation is still high. While taking it easier on interest rates could give more breathing space to banks and the economy, the fear is such a move by the Fed also could give inflation more oxygen.

Weaker- than- expected economic reports released Wednesday may have allayed some of those worries. One showed that inflation at the wholesale level slowed by much more last month than economists expected. It’s still high at a 4.6% level vs. 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 could raise worries about a recession on the horizon, but they may also take 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.