ASX threatens to tumble as new banking fears rock markets

On Wall Street, the S&P 500 closed 0.7 percent lower overnight after slipping 2 percent earlier, while markets in Europe fell sharply as Swiss-based Credit Suisse shares fell to record lows. The Dow Jones lost 0.9 percent and the Nasdaq gained 0.1 percent.

Credit Suisse has struggled for years, including losses it suffered from the 2021 collapse of investment firm Archegos Capital. Its shares in Switzerland fell more than 25 percent after reports that its main shareholder will not put more money into its investment.

Loading

Wall Street’s harsh spotlight has intensified across the banking industry of late amid worries about which institution might crack next. US bank stocks fell again on Wednesday after enjoying a brief one-day pause on Tuesday.

The heaviest losses were concentrated in smaller and mid-sized banks, which are seen as more at risk of customers attempting to withdraw their money en masse. Larger banks also fell, but not quite as much.

First Republic Bank fell 20.4 percent, a day after rising 27 percent. Fifth third Bancorp fell 5.1 percent. JPMorgan Chase slipped 5.2 percent.

Much of the damage is seen as the result of the Federal Reserve’s fastest rate hike in decades. The Fed has raised its key federal funds rate to a range of 4.5 percent to 4.75 percent from near zero early last year in hopes of bringing down painfully high inflation.

Higher interest rates can tame inflation by slowing the economy, but they increase the risk of a recession later. They also hurt the prices of stocks, bonds, and other assets. That last factor was one of the problems plaguing the Silicon Valley Bank, which collapsed on Friday after high interest rates pushed down the value of its bond investments.

There is still a great deal of uncertainty surrounding the banking industry as it struggles to weather the storm of interest rate hikes of the past year after years of historically easy conditions. In his annual letter to investors, BlackRock CEO Larry Fink pointed to previous periods of rising interest rates leading to “spectacular financial flare-ups,” such as the years-long savings and credit crunch.

“We do not yet know if the fallout from easy money and regulatory changes will spill over into the US regional banking sector (similar to the S&L crisis) and more seizures and closures are imminent,” he wrote.

Some of this week’s wildest action took place in the bond market, as traders rush to guess what all the chaos will mean for future Fed action. On the one hand, the stress in the financial system could lead the Fed to hold off on another rate hike at next week’s meeting, or at least back off from the larger rate hike it had potentially signaled.

On the other hand, inflation is still high. While an easing in interest rates could give banks and the economy more breathing room, there are fears that such a move by the Fed could also give more impetus to inflation.

Loading

As a result, the yield on two-year government bonds fell. It is trending in line with expectations for the Fed, falling from 4.25 percent to 3.85 percent late Tuesday. This is a big move for the bond market. The two-year yield was over 5 percent a week ago, the highest since 2007.

The yield on the 10-year government bond fell to 3.44 percent from 3.69 percent. It helps set interest rates on mortgages and other major loans.

The weak economic data prompted traders to place bets that the Fed could keep interest rates steady next week. That’s a sharp reversal from earlier this month when the only options seemed to be another 0.25 percentage point hike or an acceleration to 0.5 point.

With AP

The Market Recap Newsletter is a summary of the trading day. Get it every useday afternoon.