Bank stocks fell as much as 74 percent in the pre-market this morning despite Joe Biden’s efforts to calm investors after the collapse of the Silicon Valley bank.
Shares of First Republic Bank fell to as low as $21.50 from $81.76 on fears of a banking collapse when Wall Street opens trading at 9.30am.
Biden is scheduled to speak at 8 a.m. in an effort to boost confidence in the sector after the White House confirmed yesterday that it would make SVB customers “complete” and that it would “take no losses for the taxpayer.”
The rapid collapse of the SVB on Friday — the second-largest bank meltdown in history — has stoked concern about contagion in the banking sector amid the Fed’s sharpest rate hike since the early 1980s.
Investors smelled blood in the water this morning, as several US banks struggled in early trading: Backwest Bancorp stock fell 41 percent, Western Alliance Bancorp stock fell 33 percent, and Bank of America stock fell 4 percent.
US President Joe Biden walks aboard Marine One as he leaves the South Lawn of the White House, in Washington, D.C. on March 10. The Biden administration attempted to boost confidence in the sector yesterday by guaranteeing SVB and Signature Bank funds. Customers say all customers will “become complete” and “no losses will be incurred by the taxpayer.”
First Republic Bank shares fell to $21.50 from a high of $81.76 on fears of a banking meltdown when Wall Street opens trading at 9.30am.
The SVB failure tore through global markets while America slept, with European bank stocks suffering their biggest drop in over a year and bond markets seeing a massive repricing of rate hike bets.
The dollar also fell as Wall Street heavyweights such as Goldman Sachs predicted the Fed will not raise interest rates next week, capping the biggest three-day rally for short-term Treasury notes since 1987.
The yield on the 10-year US Treasury slipped to 3.507% from 3.694% on Friday as Wall Street’s so-called “fear gauge” rose, with the Cboe’s volatility index (VIX) climbing to a five-month high of 27.84.
The European banking index fell 6 percent after falling 3.8 percent on Friday. HSBC’s London listing fell 1.45 percent after it said it would acquire the UK branch of the stricken Silicon Valley bank for a symbolic sum of one pound ($1.21).
“We are witnessing a classic flight to safety,” said Tom Caddick, managing director at Nedgroup Investments. “High interest rates and a slowing economy have always been bad.”
First Republic’s clients are high net worth companies and individuals who are no longer happy leaving their money in low interest accounts.
The San Francisco-based bank said yesterday that it has secured additional financing through JPMorgan, giving it access to a total of $70 billion in funds through various sources.
The bank’s “capital and liquidity positions are very strong” and that its “capitalization remains well above the regulatory limit for well-capitalized banks,” the bank’s chairman and CEO said in a joint statement.
Despite the cash infusion, Raymond James downgraded the bank’s shares to “market perform” from “strong buy,” highlighting the risk of deposit outflows First Republic faces from panicked large depositors after the bank’s run in the SVB last week.
SVB’s failure is the largest since the collapse of Washington Mutual in 2008, a landmark event that triggered a financial crisis that crippled the economy for years. The crash of 2008 led to stricter rules in the United States and abroad.
Since then, regulators have imposed stricter capital requirements on US banks with the goal of ensuring that the collapse of individual banks does not harm the financial system and the broader economy.
Over the weekend, the Federal Reserve and the US Treasury Department announced a set of measures to stabilize the banking system and said that customers at SVB will be able to access their deposits on Monday.
A Brinks security truck is parked outside Silicon Valley Bank in Santa Clara as investors line up outside after the bank closed its doors on Friday. The Federal Deposit Insurance Corporation (FDIC) seized SVB assets today as depositors — mostly tech and startups — began withdrawing their cash after the surprise announcement of a $1.8 billion loss.
The Fed also said it would provide additional financing through a new “Term Bank Financing Program,” which would provide loans of up to one year to depository institutions, backed by Treasury bills and other assets held by those institutions.
The authorities also took over New York-based Signature Bank, the second bank to fail in a matter of days.
Most importantly, analysts noted, the Fed would accept the guarantees at par rather than register them in the market, allowing banks to borrow money without having to sell assets at a loss.
Overnight in Asia, lingering concerns were seen in Japan’s Topix Bank which lost 4 percent, while Singapore’s largest banks also fell around 1 percent.
Monday’s defeat left more than 99 percent of the companies in the European STOXX 600 index trading in the red. Only three stocks escaped the decline, namely Qinetiq, Reckitt and Vantage Towers, up 0.4 percent, 0.2 percent and 0.1 percent, respectively.
One glimmer of hope was that the futures markets showed Wall Street’s benchmark S&P 500 index opening partially higher later.
Such was the concern about financial stability that investors speculated that the Fed would now be reluctant to move the boat by raising interest rates by a hefty 50 basis points next week – and might not raise them at all.
Fed funds futures rose to cut any chance of a hike by half a point, compared to about 70 percent before the SVB news broke last week. Instead, futures indicated a 14 percent chance that the Fed would sit idly by.
The implied peak in rates fell to 5.08 percent from 5.69 percent last Wednesday, and markets returned to pricing in rate cuts by the end of the year.
“Given the pressure in the banking system, we no longer expect the FOMC to raise interest rates at its next meeting on March 22,” wrote analysts at Goldman Sachs.
“We left unchanged our forecast that the FOMC will deliver increases of 25 basis points in May, June and July and now expect a final rate of 5.25-5.5 percent, although we see significant uncertainty around the path.”
Such talk, along with a shift to safety, saw the two-year Treasury yield rise by 7 basis points at 0958 GMT to 4.63 per cent, off last week’s peak of 5.08 per cent.
Yields are now down 66 basis points in just three sessions, a drop not seen since the market crash on Black Monday in 1987.
Much will depend on what US consumer price numbers reveal on Tuesday, with the clear risk that a higher reading will put pressure on the Fed to rally even as the financial system comes under pressure.
The European Central Bank meets on Thursday and is still widely expected to raise interest rates by 50 basis points and to signal further tightening ahead, although for now it will have to take financial stability into account.
In currency markets, the dollar index, which measures the value of the greenback against a basket of currencies, fell 0.3%. The pound and the euro both rose by 0.2 percent, while the safe-haven Japanese yen rose more than 1 percent.
Gold also rose nearly 1 percent to $1,885 an ounce, after jumping 2 percent on Friday. Oil prices lost more than 1.5 percent despite Brent crude returning to $81.48 a barrel and US crude at $75.28 a barrel.
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