Global banking stocks suffered a fresh sell-off on Friday as investors failed to take comfort from the rescue package arranged for US lender 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 in Europe following the news on Thursday that a group of the biggest US banks were depositing $30 billion into San Francisco-based First Republic.
The blue-chip S&P 500 was 1.2 per cent lower in late afternoon trading in New York, while the Nasdaq Composite was down 0.8 per cent. Treasuries gained from investors’ desire for safe assets ahead of the weekend, sending yields on benchmark 10-year notes down 0.19 percentage points to 3.39 per cent.
First Republic’s shares were down 32 per cent, having lost more than two-thirds of their value in the past week. Bigger banks suffered smaller declines, with JPMorgan Chase and Bank of America sliding more than 3 per cent apiece. The KBW banks index fell 5 per cent while State Street’s exchange-traded fund tracking regional banks was down 6.2 per cent.
“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, who added that First Republic’s update on its borrowings from the Federal Reserve, which topped $100bn at one point was the most “attention-grabbing” part of the news.
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.
European markets were also 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.
Credit Suisse gave up early gains to finish 8 per cent lower. The Euro Stoxx Bank index ended down 2.8 per cent.
Germany’s Dax closed off 1.3 per cent. France’s CAC 40 dropped 1.4 per cent, while the UK’s FTSE 100 lost 1 per cent lower.
“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”.
Two-year German bond yields fell 0.05 percentage points to 2.36 per cent and 10-year yields were down 0.1 percentage points at 2.1 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.
Brent crude lost 2.7 per cent and its US equivalent West Texas Intermediate fell 2.8 per cent.
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 0.8 per cent and Hong Kong’s Hang Seng climbed 1.6 per cent.