Bank stocks took a hit on Friday, led by Germany’s Deutsche Bank, as policymakers struggled to calm nerves after failures on both sides of the Atlantic.
Europe’s Stoxx 600 banks index, which comprises the region’s biggest lenders, fell 3.8 per cent, outstripping weakness in broad national indices, led by an 8.5 per cent drop in Deutsche shares. Shares in Commerzbank fell 5.5 per cent as jitters over the wider sector persisted following the collapse of two regional US institutions and a rescue deal for Credit Suisse in recent weeks.
Bigger US banks were also under pressure, with JPMorgan down 1.5 per cent and Morgan Stanley closing 2.2 per cent lower. Goldman Sachs and Citi lost 0.7 per cent and 0.8 per cent respectively.
Troubled regional lender First Republic Bank swung between losses and gains before ending the day down 1.4 per cent. However, a better session for peers including Zion took the KBW regional banking index 2.9 per cent higher on the day.
“Clearly the main question is: What will be the next shoe to drop?” said Kevin Thozet, investment committee member at Carmignac. “What we are seeing is that market participants are trying to test where the next weak link in the banking sector is.”
Downbeat sentiment in the banking sector and fears about contagion kept gains in check in broader markets. The US’s benchmark S&P 500 ended the day 0.6 per cent higher after more muted moves earlier in the session, while the Nasdaq Composite added 0.3 per cent. Meanwhile, Europe’s overall Stoxx 600 gauge closed 1.4 per cent lower.
Bank stocks have had a turbulent March as traders fret over the blow to lenders from central banks’ aggressive interest rate rises over the past year.
“Europe is very tilted towards banks, which have been in the eye of the storm,” said Emmanuel Cau, head of European equity strategy at Barclays. “There are bank-specific issues to worry about like regulation and deposit safety.”
Deutsche’s slide came after a surge this week in the cost of insuring the lender’s debt against default.
The price of the bank’s five-year credit default swaps — derivatives that act like insurance and pay out if a company defaults on its payments — climbed from below 150 basis points on Wednesday to 200bp on Friday, according to data from Refinitiv.
Global authorities have tried to assuage investors’ concerns after the failure of several US regional banks, and last weekend’s hasty takeover of Credit Suisse by its rival UBS.
“Deutsche Bank has fundamentally modernised and reorganised its business and is a very profitable bank,” Germany’s chancellor Olaf Scholz said on Friday, after being asked if the lender was the “new Credit Suisse”. “There is no reason to be concerned about it.”
European Central Bank president Christine Lagarde told a eurozone summit in Brussels that the banking sector was “strong” and that the ECB was fully equipped to provide liquidity to the euro area financial system if needed, according to an EU official.
She insisted there was “no trade-off” between controlling inflation and fostering financial stability.
US Treasury secretary Janet Yellen on Thursday said regulators were “prepared to take additional actions if warranted” to ensure the safety of bank deposits. But efforts to stem the selling have had only fleeting effects.
Central banks in the eurozone, US and UK have all pushed ahead with interest rate rises to fight stubbornly high inflation this month, despite the banking sector turmoil, which itself is partly the result of rapidly increasing borrowing costs over the past year. Fed officials on Friday doubled down on their decision to deliver a quarter-point rate rise despite the stress in the banking sector.
“There’s still a nagging question amongst market participants over whether the turmoil in the banking sector is over or if there will be wider contagion,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe.
“It is also now evident from central banks that the turmoil is not going to put a hard brake on their monetary policy actions — that’s sending jitters through markets because it might exacerbate or expose new vulnerabilities in the banking sector.”
Dirk Willer, strategist at Citigroup, said it was “too early to tell” whether banking sector stress would have an impact on the wider US economy. But he added the Federal Reserve and the ECB had “become more cautious” about tightening monetary policy. He predicted the US was likely to enter a recession this year, noting that “the banking stress tightens credit”.
Economists are now anticipating the Fed will pause its rate-raising cycle, keeping rates on hold at its next meeting in May before cutting in September, while anticipating a 0.25 percentage point rise from the ECB meeting and no cuts in 2023.
Additional reporting by Guy Chazan in Berlin