Markets are sinking amid worries about banks and a downward spiral of the economic outlook

Stocks fell on Tuesday, as concerns about the health of the financial sector after the collapse of the First Republic bank collided with broader anxiety stemming from signs of a weakening economy.

Some regional banks, which have been under pressure since the failures of Silicon Valley and Signature Bank in March, took big hits on Tuesday, shattering the relative calm that prevailed after First Republic was expropriated and sold to JPMorgan Chase by regulators on Monday.

PacWest stock has lost more than 20 percent of its value, the worst single-day drop since the height of the banking turmoil in March. Western Alliance sank nearly 20 percent, while Comerica Bank and Zions suffered double-digit percentage declines.

The moves came along with data showing that US manufacturers received fewer-than-expected new orders in March, and continued cooling in the labor market that month, with fewer job openings and more layoffs. Oil prices have also fallen sharply as the prospect of an economic downturn is likely to lower energy demand. The price of a barrel of Brent crude, the international benchmark, has fallen to around $76, which is close to its lowest level for the year.

The S&P 500 index fell by 1.3 percent. Energy stocks fell the most, with the sector as a whole down more than 4 percent, followed by the financial sector, down about 2.5 percent.

“The bank problem will continue,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “The idea that giving First Republic to JPMorgan would end this, I never believed it. There is a real fear of instability and economic slowdown.”

Investors also expressed concern about the Federal Reserve’s meeting on Wednesday, when the central bank is expected to raise interest rates. The Fed has raised interest rates rapidly over the past year in an effort to cool the economy and tame stubbornly high inflation. But high interest rates were the root cause of the problems for the banks.

Some investors worry that pushing interest rates higher could lead to another wave of turmoil, as consumers move bank deposits, which earn relatively little in interest, to alternatives like money market funds that offer higher returns. To retain customers, banks can offer higher interest on deposits, but this puts pressure on their profit margins.

“So far, the Fed appears to be a bit of an outlet,” said Christina Huber, chief global market strategist at Invesco. “They’re too laser-focused on inflation, which is the rear-view mirror problem, rather than on the damage they can do by raising prices even further.”

Based on market prices, investors still expect the Federal Reserve to raise interest rates by a quarter point on Wednesday. But that conviction has weakened somewhat, with bets tilted towards a rate cut as soon as September, a possible outcome only if inflation drops sharply or the economy slips into a severe recession.

The two-year Treasury yield, which is sensitive to changes in interest rate expectations, fell nearly a fifth of a point on Tuesday, to less than 4 percent, a significant move for an asset that typically moves a hundred percentage points each day.

in another place, A survey of bank lending terms The European Central Bank published on Tuesday showed that lenders in the eurozone are cutting back on lending faster than at any time since the 2011 European debt crisis. Concerns about the credit crunch squeezing the economy are becoming more prominent among US policymakers.

Adding to the murky outlook, US lawmakers have yet to agree on a deal to raise the ceiling on how much debt the government can take on, with administration officials warning it could run out of cash by June.

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