Day: March 24, 2023

(C) Reuters. FILE PHOTO: Passersby walk past an electric monitor displaying Japan’s Nikkei share average and recent movements outside a bank in Tokyo, Japan, March 22, 2023. REUTERS/Issei Kato

By Koh Gui Qing

NEW YORK (Reuters) -Global stock markets swooned on Friday as fears about contagion among banks hobbled shares of lenders such as Deutsche Bank (ETR:DBKGn), with the flight from risk shoring up the dollar and driving bond yields lower.

Market sentiment was hurt by a sell-off in Deutsche shares, which tumbled as much as 15%, as its credit default swaps, which reflect the cost of insuring debt against the risk of non-payment, shot to their highest in more than four years.

“The growing sense of unease about the global banking system is heightening volatility in stock markets around the world,” said Nigel Green, chief executive of deVere Group, a financial advisor.

The failure of U.S. regional banks Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) this month triggered fears of a banking contagion and prompted U.S. Treasury Secretary Janet Yellen on Thursday to pledge action to safeguard bank deposits.

“As concerns about the stability of banks persist, we expect further and intensifying market volatility,” Green said.

The Dow Jones Industrial Average reversed earlier losses to end up 0.41%, the S&P 500 added 0.56%, and the Nasdaq Composite Index rose 0.31%.

JP Morgan Chase (NYSE:JPM) dropped 1.52%, the S&P 500 banks index was down 0.33%, while the KBW regional bank index climbed 2.92%.

In Europe, the STOXX 600 index fell 1.37%, helping to drag the MSCI World share index down 0.21%.

A STOXX sub-index of bank shares, which has swung wildly this week as traders debated if a forced weekend tie-up between Credit Suisse and UBS was a mark of stability or incoming systemic stress, dropped 4.64%, heading for its third consecutive week of declines.

Deutsche, which had announced plans on Friday to redeem $1.5 billion of tier 2 debt not due to be repaid until 2028, slumped 8.5%. For the month so far, Deutsche has shed 27.6%.

The moves highlight just how frail sentiment remains after turmoil in the U.S. and European banking sectors in the past two weeks have revived memories of the 2008 global financial crisis.

Yellen has this week tried to assuage fears about the health of U.S. lenders and the economic ramifications of a potential lending crunch if depositors flee smaller banks, which have outsized roles in supporting key sectors such as commercial real estate.

“I don’t expect this volatility (in bank stocks) to subside anytime soon,” said Peter Doherty, head of investment research at private bank Arbuthnot Latham in London.

Doherty said issues of “contagion risk within the U.S. banking sector” were undoubtedly weighing on appetite for bank stocks elsewhere.

Stronger demand for safe-haven assets, and bets that the Federal Reserve will soon pause its policy tightening cycle due to the banking turmoil, pushed the two-year U.S. Treasury yield, which tracks interest rate expectations, down about 3.5 basis points to 3.7709%. [US/]

Traders have also priced in U.S. rate cuts of about 90 bps basis points to about 3.9% by the end of the year.

Euro zone government bond yields followed Treasury yields lower, with two-year German yields dropping a hefty 25 bps to 2.25%.

In currencies, the dollar reversed a losing streak to gain 0.49% against major peers as risk aversion strengthened appetite for the reserve currency.

The Japanese yen, a safe haven currency, was steady at 130.705 after hitting a six-week high of 129.8 per dollar. The euro fell about 0.6% to $1.07620.

Brent crude, the global oil benchmark, fell 1.2% to $74.99 per barrel, as banking sector concerns dimmed the outlook for energy demand.[O/R]

A firmer dollar dragged on gold prices, though they were still on track to end higher for the week, for the fourth consecutive week, as bank contagion worries and bets about a pause in Fed rate hikes bolstered the appeal of non-yielding bullion. [GOL/]

Spot gold lost 0.82%, at $1,977.2 per ounce.

The Fed raised its main interest rate by a quarter point to a range of 4.5%-4.75% on Wednesday, but signalled it would consider a pause in light of banking system stresses.

Markets, however, are betting on a U.S. recession and incoming rate cuts.

“You could have a period where you see a precipitous drop in the (availability of) credit in the U.S.,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management. “This takes us closer to a hard landing, to a U.S. recession.”

(C) Reuters. Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 23, 2023. REUTERS/Brendan McDermid

By Stephen Culp

NEW YORK (Reuters) – U.S. stocks closed higher on Friday, marking the end of a tumultuous week as Federal Reserve officials calmed investor fears over a potential liquidity crisis in the banking sector.

While all three major U.S. stock indexes started the session sharply lower on the heels of a sell-off among European banks, those losses reversed by closing bell, repeating the intraday roller coaster ride of recent sessions.

At the conclusion of an up-and-down week, marked by a Fed interest rate hike and mounting worries over the health of the banking system, all three indexes notched weekly gains.

“Equity markets drifted higher as concerns lingered about another banking flare up in the U.S. or abroad,” said David Carter, managing director at JPMorgan Private Bank in New York. “Wall Street is taking its cues from Washington and other capitals as it relates to interest rates and banking regulations.”

In separate appearances, three regional Fed bank presidents said that their confidence that the banking system was not facing a liquidity crisis is what led to the decision to implement a 25 basis point policy rate hike on Wednesday.

But while Fed officials continue to see additional rate hikes as a strong possibility, financial markets are now favoring the likelihood of a no hike at all at the conclusion of its next policy meeting in May.

“The Fed may be jaw-boning a bit as it says more rate increases may be coming this year,” JPMorgan’s Carter added. “It helps both their inflation goal and suggests confidence in our economic system.”

Worries over potential contagion beyond regional banks threatening to spread to their larger peers was sparked by a sell-off of European bank shares.

That sell-off was prompted by the rising cost of insuring Deutsche Bank (ETR:DBKGn)’s debt, expressed by its credit default swaps, coming on the heels of the state-sponsored buyout of Credit Suisse, has fed into the narrative of sector-wide stress.

But those worries eased by mid-afternoon.

While the S&P Bank index ended modestly lower, the KBW Regional Bank index jumped 2.9%.

The Dow Jones Industrial Average rose 132.28 points, or 0.41%, to 32,237.53, the S&P 500 gained 22.27 points, or 0.56%, to 3,970.99 and the Nasdaq Composite added 36.56 points, or 0.31%, to 11,823.96.

Nine of the 11 major sectors in the S&P 500, with defensive sectors such as utilities and real estate enjoying the biggest percentage gains. Consumer discretionary and financials were the two losers.

U.S.-traded shares of Deutsche Bank dropped 3.1%.

Shares of major U.S. banks, such as JPMorgan Chase & Co (NYSE:JPM), Wells Fargo (NYSE:WFC) pared their losses but still ended lower, while Bank of America (NYSE:BAC) flipped green.

Regional lenders PacWest Bancorp, Western Alliance (NYSE:WAL) Bancorp jumped 3.2% and 5.8%, respectively, while First Republic Bank (NYSE:FRC) dropped 1.4%.

Activision Blizzard (NASDAQ:ATVI) jumped 5.9% after the UK competition regulator dropped some competition concerns in the Microsoft-Activision deal.

Advancing issues outnumbered declining ones on the NYSE by a 1.47-to-1 ratio; on Nasdaq, a 1.26-to-1 ratio favored advancers.

The S&P 500 posted four new 52-week highs and 35 new lows; the Nasdaq Composite recorded 34 new highs and 298 new lows.

Volume on U.S. exchanges was 11.08 billion shares, compared with the 12.84 billion average over the last 20 trading days.