Credit Suisse shares tumble as bank fears weigh on stocks

Credit Suisse shares tumble as bank fears weigh on stocks

  • Finance
  • March 16, 2023
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Stocks fell on Wednesday amid renewed worries about the banking sector, even as Wall Street more than halved losses by the closing bell.

The S&P 500 closed down 27 points, or 0.7%, at 3,892. The Dow posted a slightly steeper decline of 281, or 0.9%, to 31,875, while the Nasdaq edged higher on subsequent gains in technology stocks. Government bond yields fell after several weaker-than-expected economic reports.

Switzerland’s Credit Suisse sparked a broad sell-off early Wednesday after its shares fell to a new low. Markets pared some of their losses as the Swiss National Bank said it could lend support to Credit Suisse if needed.

The Switzerland-based Wall Street bank has tanked after reports that its major shareholder will no longer pump more money into the ailing company. Saudi National Bank officials said they could not shore up their investments in Credit Suisse citing regulatory concerns.

The banking giant in February reported a $1.6 billion fourth-quarter loss after customers withdrew $88.3 billion from the bank in the first two weeks of October amid fears of instability after a year of scandals and restructuring , Bloomberg reported. The annual loss was $7.9 billion, the largest annual loss since the 2008 financial crisis, CNN reported.

global problem

“Credit Suisse is not just a Swiss problem, it’s a global one,” said Andrew Kenningham, chief economist for Europe at Capital Economics, in a research note.

“The problems at Credit Suisse once again raise the question of whether this is the beginning of a global crisis or just another ‘idiosyncratic’ case,” he said, noting that “it is not the only bank caught up in the We’ve struggled with weak profitability in recent years.” Given that, and the collapses of regional banks in the US, “it would be foolish to assume there won’t be any further problems,” Kenningham said.

Indeed, the three recent bank failures in the US have made investors nervous, and the news from Credit Suisse prompted renewed selling of bank stocks in both the US and Europe.

“The collapse of the US Silicon Valley bank poses the greatest threat to the financial system since the global financial crisis,” said Evghenia Sleptsova, senior EM economist at Oxford Economics, in a research note. “Although SVB was only the 16th largest US bank, markets see it as potentially symptomatic of similar problems at other banks around the world, many of which hold large portfolios of long-dated securities that could suffer severe losses if sold before maturity .”

“Swirl of Negativity”

Confidence in the banking system has eroded within days of the collapse of Silicon Valley Bank on Friday and Signature Bank on Sunday.

“The whole incident at Credit Suisse on Wednesday morning highlights how unique in the industry are banks whose entire business model depends on financial market confidence,” Vital Knowledge analyst Adam Crisafulli said in a report. “If people THINK there’s a problem, there WILL be a problem.”

Damaged confidence in the banking system in the US and Europe makes more vetted lenders like Credit Suisse “particularly vulnerable to spiraling negativity,” Crisafulli warns, regardless of the stability of the company in reality.

“What happened specifically for Credit Suisse this morning was that the head of its largest shareholder ruled out further equity injections on REGULATORY grounds (not concerns about the health of the institution),” he noted.

For banks and regulators, Crisafulli said, finding ways to boost investor confidence is key to breaking them
“the feedback loop of darkness.”

The sell-off hits regional banks in particular

Most of the premarket declines in the S&P 500 early Wednesday were regional banks, with Zion Bancorp, KeyCorp, Commerce and Regions all down between 5% and 8%. Larger banks also lost ground, with Wells Fargo, Bank of America and Citigroup all falling between 3% and 4%.

Banks struggle for most of the year as higher interest rates mean fewer people and businesses are borrowing, part of the Federal Reserve’s goal of trying to cool the economy and bring down high inflation of the past four decades .

Investors returned to the bond market on Wednesday, sending yields lower after recovering somewhat the previous day. The 2-year yield fell to 4.05% from 4.25% late Tuesday, and the 10-year yield slipped to 3.53% from 3.69%.

Shares rallied on Tuesday after the government said consumer prices were down from the previous month, largely in line with analysts’ expectations. The data showed that core inflation, which excludes volatile energy and food prices to show a clearer trend, was 0.5% mom in February, up slightly from January’s 0.4% gain. The Fed pays close attention to core inflation when deciding monetary policy.

Investors fear the Fed will overreact

Investors fear the Fed may respond to ongoing upward pressure on prices by accelerating the pace of rate hikes in a bid to dampen economic activity and inflation.

The Fed faces a dilemma of how to respond when banks are already under pressure after the fastest rate hikes in a decade have pushed down asset prices.

“The Fed is stuck between a rock and a hard place,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

“Inflation has met expectations, but couple them with a stern warning that they may have to rise further if inflation trends don’t improve.”

Biden says banking system safe after two banks failed in days 03:38

He said the Fed has other tools at its disposal besides rate hikes. Among them: The Fed could adjust the rate at which it shrinks its vast stash of bond investments, a move that effectively tightens the screws on the financial system.

President Biden and regulators have tried to reassure the public that risks are limited and deposits at other banks are safe.

Later on Wednesday, the government will report retail sales and give the Fed more data to chew on ahead of its meeting next week, when the central bank will decide whether or not to raise interest rates for a ninth straight session.

In energy markets, US crude slipped $1.039 to $70.24 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $3.47 to $71.33 on Tuesday.

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