European stocks tanked Monday while US stocks fell as investors shrugged off global efforts to stem a fast-moving crisis emanating from the US banking sector.
The dollar fell as the turmoil sparked uncertainty over the US Federal Reserve’s plans to hike interest rates, while oil prices slumped.
Fears that the collapse of Silicon Valley Bank (SVB) on Friday could spark contagion throughout the banking system forced the Fed, the Treasury Department and Federal Deposit Insurance Corp over the weekend to promise to fully protect all depositors and give backup to any lenders struggling to find cash, providing easier terms on short-term loans.
US president Joe Biden said Monday that ‘Americans can have confidence that the banking system is safe’ as he vowed to push for tougher regulations on banks.
Wall Street opened lower, with the Dow and Nasdaq dropping 0.7 per cent, while the S&P 500 fell 1.0 per cent.
But Briefing.com analyst Patrick O’Hare said: ‘Looking at the bank stocks doesn’t engender a lot of confidence either that the problem has been solved.’
Shares in First Republic Bank tumbled 65 per cent, PacWest Bancorp 35 per cent, Comerica 33 per cent and KeyCorp 23 per cent as trading got underway.
O’Hare pointed to an emerging credibility problem for the Fed in its role as bank regulator.
‘The speed at which Silicon Valley bank collapsed makes it look like the Fed was asleep at the switch as a regulator; and to be sure, Fed chair Powell didn’t sound any alarms about banking issues in his semi-annual monetary policy testimony last week,’ he said.
Fears about contagion dominated trading in Europe.
Germany’s finance watchdog insisted the collapse of Silicon Valley Bank (SVB) posed no threat to financial stability, and France’s economy minister declared US bank failures had no contagion risk.
However, European equities tipped deep into the red, with bank shares falling particularly hard in Italy and Switzerland.
Frankfurt and Paris stock markets dropped by about three per cent as trading in NY got underway, while Milan dived almost five per cent at one stage.
London fell 2.5 per cent with losses capped after HSBC agreed to buy SVB’s UK division for a nominal £1 ($1.2).
‘Far from calming nerves, fear of contagion has ramped up further with investors dumping risk assets across Europe,’ City Index analyst Fiona Cincotta told AFP.
‘Banks are leading the charge southwards with investors taking aim at Spanish and Italian banks, suggesting that these are considered the weakest links as fears rise.’
Asian stocks diverged on US pledges to backstop troubled lenders after the collapse of SVB was followed by the failure of Signature Bank.
US authorities unveiled sweeping measures to ease concerns over the health of the banking system but it was insufficient to soothe market fears of an imploding banking sector.
Friday’s collapse of SVB, which specialised in venture-capital financing largely in the tech sector, came after a huge run on deposits left it unable to stay afloat on its own.
SVB is the largest retail bank to fall since the 2008 financial crisis.
Its problems had built up as the US Federal Reserve’s interest rate hikes meant securities it owned were selling for significantly less — a problem other banks could face.
On Sunday, New York regulators said they had closed another lender, Signature Bank.
The Fed, the Treasury Department and Federal Deposit Insurance Corp. in a joint statement said SVB depositors would have access to ‘all of their money’ starting Monday, March 13, and that taxpayers will not have to foot the bill.
The SVB crisis will complicate the Fed’s plans to further hike interest rates as it struggles to rein in inflation, with investors now expecting it will lift them just 25 basis points at its next meeting, rather than the 50 points tipped last week.
‘The Fed is now in question over even a 25-point hike at the next meeting,’ Strategic Alpha analyst Maurice Pomery told AFP.
‘The issue for me is that many businesses were constructed on zero interest rates, leverage and debt model — which with rising rates is no longer viable,’ he warned.
This NEWS originally published in Dhaka based News Paper The New Age.
