Thu. Mar 30th, 2023


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Stocks Wobble as Smaller Banks Plunge on Fears of Contagion

2 min read

The stocks of U.S. regional banks plummeted on Monday, as investors reassessed how much such lenders were worth following the sudden collapse of Signature Bank and Silicon Valley Bank.

The volatile conditions led to trading in roughly a dozen banks being halted after triggering so-called circuit breakers, which are meant in part to prevent runaway crashes.

Arizona-based Western Alliance stood out as the worst mover on the day, down 80 percent in early trading. First Republic Bank tumbled 75 percent, Utah-based Zions Bancorp fell around 20 percent, Comerica tumbled about 30 percent, East West Bancorp fell 30 percent and Regions Financial, headquartered in Birmingham, Ala., was down around 10 percent.

Shares of bigger banks were less affected, but not immune. Citigroup and Wells Fargo fell over 4 percent, Bank of America fell over 3 percent, and JPMorgan Chase dipped by around 1 percent. The KBW bank index, which tracks the performance of 24 major banks, fell 10 percent, adding to sharp losses last week that erased nearly $200 billion from the aggregate value of the banks in the index.

The broader S&P 500 stock index shrugged off the worst of the pain in the banking sector, which is one of the smaller sectors of the index and therefore has less impact on the overall market. The S&P 500 rose slightly by late morning.

The crisis in the banking sector also prompted a swift re-evaluation of the number of times the Federal Reserve will raise interest rates, as fears over the resilience of the economy are expected to stay the central bank’s hand.

That led to U.S. government debt markets experiencing their biggest moves since Black Monday in 1987, which was one of the most severe market crashes on record. The two-year Treasury yield, which is sensitive to changes in interest rate expectations, fell 0.54 percentage points in morning trading, to just above 4 percent, its biggest one-day drop since October 1987.

That might not sound like a lot, but the yield normally moves in tiny fractions of a percentage point each day, and only topped 5 percent last week for the first time since mid-2007. The move on Monday recalled the biggest moves around the fall of Lehman Brothers and the tech crash of the early 2000s.

Having ramped up bets that the Fed would raise interest rates by as much as a full percentage point in the coming months, investors are now doubting whether the Fed would be that aggressive.

The Fed has used higher rates to slow the economy and lower inflation, which is also at the root of the pain being felt in the banking sector. Goldman Sachs said it believes the Fed would no longer raise interest rates at its meeting next week.

Investors’ expectations for where the Fed will set interest rates by June have fallen from 5.5 percent last week to 4.7 percent on Monday. In line with the slump in interest rates, the dollar fell 0.9 percent against a basket of currencies of America’s major trading partners.

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