Kiwi companies have at least NZ$162m caught up in the US Silicon Valley Bank Collapse. Plus, US inflation data could rock markets this week. Video / NZ Herald
Stock markets tumbled on Wednesday (US time) as investors’ fears over the health of the banking industry resurfaced and spread around the world, undoing a rally Tuesday when the panic appeared to pause.
New Zealand shares followed, the key S&P/NZX50 index was down 0.94 per cent at 11,547 shortly afterthe market opened this morning.
On Wall Street, the S&P 500 fell 1.6 per cent at the open of trading, reversing all of the previous day’s gains. European markets were also hard hit, with stocks of many of the region’s biggest banks falling sharply, as anxiety persists about the fallout from the collapse of Silicon Valley Bank and Signature Bank, which were seized by regulators after suffering devastating runs on deposits.
The catalyst for the day’s turmoil appeared to be Credit Suisse, the mistake-prone Swiss bank that has struggled for years to turn around its fortunes, with customers steadily shifting their assets to rival banks. It recorded the most eye-catching decline, with its shares losing roughly 30 per cent, setting yet another record low.
On Wednesday, the bank’s largest shareholder, Saudi National Bank, ruled out providing more money for Credit Suisse as it struggles with its latest turnaround plan.
The banks’ bond prices plummeted and the cost of insuring the bank’s debt against a possible default soared. S&P Global Ratings said on Tuesday that European banks had little exposure to Silicon Valley Bank or Signature Bank, nor did they view any European banks as being exposed to the same risks. “That said, we are mindful that SVB’s failure has shaken confidence,” analysts at the rating agency said.
The shares of midsize US regional banks that have been hit hard after Silicon Valley Bank collapsed resumed their declines. First Republic Bank slipped 24 per cent, PacWest fell 14 per cent, Western Alliance lost 7 per cent and Zions Bank dropped more than 5 per cent.
The catalyst for the day’s turmoil appeared to be Credit Suisse, the mistake-prone Swiss bank that has struggled for years to turn around its fortunes. Photo / 123RF
Shortly before the market opened, S&P Global Ratings cut the credit rating of First Republic by several notches, into so-called junk territory. “We believe the risk of deposit outflows is elevated,” the ratings agency said, noting that the bank’s deposit base is more concentrated than many other banks, with a large share of commercial clients holding balances above the US$250,000 (NZ$404,386) limit insured by the government.
The biggest banks also suffered somewhat, with the shares of JPMorgan Chase and Bank of America both sliding more than 3 per cent.
The plunge in Credit Suisse’s shares set off temporary halts in its trading. Shares of two French banks, Société Générale and BNP Paribas, fell more than 10 per cent, while Deutsche Bank in Germany and Barclays in Britain shed 8 per cent. The broad-based Stoxx 600 index fell by 2.7 per cent, dragged down by the banks.
Nervousness was also apparent in the bond markets, with yields on government notes falling on expectations that the Federal Reserve could become more cautious about raising interest rates. Stubborn inflation would usually call for higher rates, but turmoil in the banking system could require more caution. Higher interest rates raise costs for companies and were at the root of the pain felt by banks over the past week.
The Fed is scheduled to meet next week to set rates. The European Central Bank, which has also been raising interest rates to combat inflation, will meet on Thursday.
A new reading of wholesale prices in the United States released on Wednesday showed that producer price inflation in February was not as rapid as anticipated, while fresh data on retail sales revealed a decline last month that was largely in line with expectations.
“Fed is nuts if they think they can tighten,” said Andrew Brenner, the head of international fixed income at National Alliance Securities. “They will break the bank system if they keep thinking like this.”
The yield on the two-year Treasury bond, which is particularly sensitive to Fed policy, fell by more than a third of a percentage point, a big move for that asset, to around 3.85 per cent.
Futures markets still expect that Fed policymakers will raise rates by a quarter-point at their next meeting, but they now believe that the central bank will begin cutting rates in the second half of the year, setting rates at a lower level at the end of the year than they are now.
In a sign of the whipsaw trading conditions confronting traders, a measure of volatility in the bond market soared to its highest level since 2009.
“The US banking system remains resilient and on a solid foundation, with strong capital and liquidity throughout the system,” Michelle Bowman, a Federal Reserve governor, said at a conference in Hawaii on Tuesday. She added that the Fed’s board of governors “continues to carefully monitor developments in financial markets and across the financial system”.
In a further sign of the global spillover of concern about the banking system, Vietnam’s central bank slashed interest rates overnight as it looks to support its economy.
And in debt markets, where banks and other investors facilitate loans to companies across the world, investors’ fears were reflected in sliding bond and loan prices on Wednesday. The moves amplified concerns about the potential knock-on effect from stress in the banking sector, and among some startup tech companies, leading to some companies being unable to repay their debts.
“Systemic risks are not our base case, but fragility is back,” noted analysts at Bank of America.
