ASX sheds $40 billion as fresh bank crisis rattles global markets

On Wall Street overnight, the S&P 500 closed 0.7 per cent lower after earlier shedding 2 per cent, while markets in Europe fell sharply as shares of Switzerland’s Credit Suisse tumbled to a record low. The Dow Jones lost 0.9 per cent and the Nasdaq gained 0.1 per cent.

Credit Suisse has been fighting troubles for years, including losses it took from the 2021 collapse of investment firm Archegos Capital. Its shares in Switzerland tanked by more than 25 per cent after reports that its top shareholder won’t pump more money into its investment.

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Wall Street’s harsh spotlight has intensified across the banking industry recently on worries about which institution could crack next. Stocks of US banks tumbled again on Wednesday after enjoying a brief, one-day respite on Tuesday.

The heaviest losses were focused on smaller and mid-size banks, which are seen as more at risk of having customers try to pull their money out en masse. Larger banks also fell, but not by quite as much.

First Republic Bank sank 20.4 per cent, a day after soaring 27 per cent. Fifth Third Bancorp dropped 5.1 per cent. JPMorgan Chase slid 5.2 per cent.

Much of the damage is seen as the result of the US Federal Reserve’s fastest barrage of rises to interest rates in decades. The Fed has pulled its key overnight rate to a range of 4.5 per cent to 4.75 per cent, up from close to zero at the start of last year, in hopes of driving down painfully high inflation.

Higher rates can tame inflation by slowing the economy, but they raise the risk of a recession later on. They also hurt prices for stocks, bonds and other investments. That last factor was one of the issues hurting Silicon Valley Bank, which collapsed on Friday after the high rates forced down the value of its bond investments.

There’s still great uncertainty about the banking industry as it struggles to absorb the past year’s blizzard of rate rises following years of historically easy conditions. In his annual letter to investors, BlackRock CEO Larry Fink pointed to prior eras of rising rates that led to “spectacular financial flameouts”, such as the years-long savings and loan crisis.

“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming,” he wrote.

Some of this week’s wildest action has been in the bond market, where traders are rushing to guess what all the chaos will mean for future Fed action. On one hand, stress in the financial system could push the Fed to hold off on raising rates again at its meeting next week, or at least refrain from the larger rate increase it had been potentially signalling.

On the other hand, inflation is still high. While taking it easier on interest rates could give more breathing space to banks and the economy, the fear is such a move by the Fed could also give inflation more oxygen.

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That caused the yield on the two-year Treasury to plummet. It tends to track expectations for the Fed, and it dropped to 3.85 per cent from 4.25 per cent late on Tuesday. That’s a huge move for the bond market. The two-year yield was above 5 per cent just a week ago, at its highest level since 2007.

The yield on the 10-year Treasury dropped to 3.44 per cent from 3.69 per cent. It helps set rates for mortgages and other important loans.

The weak economic data pushed traders to build bets that the Fed may end up holding rates steady next week. That’s a sharp turnaround from earlier this month, when the only options seemed to be another rise of 0.25 percentage points or an acceleration to 0.5 points.

With AP

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