NEW YORK, March 25 — Global stock markets swooned yesterday as fears about contagion among banks hobbled shares of lenders such as Deutsche Bank, 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 per cent, 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 US regional banks Silicon Valley Bank and Signature Bank this month triggered fears of a banking contagion and prompted US 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 per cent, the S&P 500 added 0.56 per cent, and the Nasdaq Composite Index rose 0.31 per cent.
JP Morgan Chase dropped 1.52 per cent, the S&P 500 banks index was down 0.33 per cent, while the KBW regional bank index climbed 2.92 per cent.
In Europe, the STOXX 600 index fell 1.37 per cent, helping to drag the MSCI World share index down 0.21 per cent.
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 per cent, heading for its third consecutive week of declines.
Deutsche, which had announced plans on Friday to redeem US$1.5 billion of tier 2 debt not due to be repaid until 2028, slumped 8.5 per cent. For the month so far, Deutsche has shed 27.6 per cent.
The moves highlight just how frail sentiment remains after turmoil in the US 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 US 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 US 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 US Treasury yield, which tracks interest rate expectations, down about 3.5 basis points to 3.7709 per cent.
Traders have also priced in US rate cuts of about 90 bps basis points to about 3.9 per cent 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 per cent.
In currencies, the dollar reversed a losing streak to gain 0.49 per cent 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 per cent to US$1.07620.
Brent crude, the global oil benchmark, fell 1.2 per cent to US$74.99 per barrel, as banking sector concerns dimmed the outlook for energy demand.
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.
Spot gold lost 0.82 per cent, at US$1,977.2 per ounce.
The Fed raised its main interest rate by a quarter point to a range of 4.5 per cent-4.75 per cent on Wednesday, but signalled it would consider a pause in light of banking system stresses.
Markets, however, are betting on a US recession and incoming rate cuts.
“You could have a period where you see a precipitous drop in the (availability of) credit in the US,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management. “This takes us closer to a hard landing, to a US recession.” — Reuters
