US equities tumbled on Friday while Treasuries gained, capping a tumultuous week for global markets as concern mounted that the turmoil rocking the banking sector will tip the global economy into recession.
(Bloomberg) — US equities tumbled on Friday while Treasuries gained, capping a tumultuous week for global markets as concern mounted that the turmoil rocking the banking sector will tip the global economy into recession.
The S&P 500 fell as much as 1.3% after the index rallied 1.8% yesterday as larger banks threw a lifeline to First Republic Bank, the latest US lender to signal stress. That didn’t stop a rout in First Republic. Other regional lenders also tumbled with a gauge of the sector dropping more than 10% this week. FedEx Corp. was one of the bright spots on the benchmark, jumping around 8% after the courier boosted its profit outlook.
The Nasdaq 100 dropped after wavering between gains and losses earlier. The rates-sensitive gauge is still heading for its best week since November amid expectations the Federal Reserve will temper its tightening path. The 10-year Treasury yield deepened its decline after a softer-than-expected reading on inflation expectations. An index of the dollar fell.
Banks including JPMorgan Chase & Co. and Citigroup Inc. banded together in a show of support for First Republic on Thursday. While the rescue attempt initially boosted sentiment, billionaire investor Bill Ackman was among those questioning whether it would be enough to halt the crisis. Meanwhile, US banks borrowed a combined $164.8 billion from two Federal Reserve backstop facilities in the most recent week, a sign of escalated funding strains in the aftermath of Silicon Valley Bank’s failure.
“The Fed’s rate hiking cycle was already feeling restrictive, so now that we have rising risks of more bank bailouts and even tighter credit standards, the growth outlook for the economy is rather bleak,” Edward Moya, a senior market analyst at Oanda, wrote. “Next week will be huge as markets are unsure if the Fed will continue to tighten or given this week’s banking turmoil decide to hold.”
Friday’s quarterly triple witching, where contracts for index futures, equity index options and stock options all expire, could amp up swings in trading.
The Stoxx Europe 600 index turned lower while shares in the troubled Swiss lender Credit Suisse Group AG resumed a decline, falling as much as 13% after the idea of a forced combination with a larger rival UBS Group AG was shot down. The stock had rallied 19% Thursday after the Swiss central bank stepped in with support.
Markets were also digesting a 50 basis points rate hike by the European Central Bank. By making it clear that stress points in the banking industry — as well as economic data — will guide future rate decisions, ECB Chief Christine Lagarde paved the way for bond-market gyrations to remain elevated for the remainder of the year as traders try to figure out when the hiking cycle will end.
US two-year yields have whipsawed at least 20 basis points a day for six straight sessions through Thursday as traders re-calibrated rate-hike bets. Market pricing for the Fed’s March 21-22 meeting has lurched between another quarter-point hike, and the first rate pause in more than a year. US overnight indexed swaps are now pricing for around a 60% probability of a quarter-percentage point Fed rate hike next week.
Wall Street remains divided on which way the central bank should move. Anastasia Amoroso, chief investment strategist at iCapital, told Bloomberg Television that the confidence signaled by a 25 basis point hike from the Fed would not go “that far.”
“They have to pause,” said Amoroso. “The biggest signal of confidence would be to say, we are attuned to the issue. We want to take the time to make sure we have the right approach in place before we resume that rate hiking cycle. To me that would be the best approach.”
BlackRock Investment Institute does not expect cracks in the financial sector to deter central banks from raising rates further to contain inflation. It expects both the ECB and the Fed to “go as far as possible to distinguish their inflation fighting campaigns from measures to deal with bank troubles and safeguard the financial system,” a team of BlackRock analysts wrote in a note.
Jack Manley, global market strategist at JPMorgan Investment Management expects some kind of Fed reprieve next week and that could bring markets a “sigh of relief.”
“Financial stability is more important than inflation. And the Fed’s going to have an awfully hard time transmitting monetary policy through a banking system that it’s broken,” Manley told Bloomberg Television.
Bitcoin rose to the highest level since June amid a broad rally in cryptocurrencies. Other tokens such as Ether, Solana and Polkadot surged as well. Oil is heading for the worst week so far this year. Gold rose.
These are the main market moves:
- The S&P 500 fell 1% as of 11:16 a.m. New York time
- The Nasdaq 100 fell 0.5%
- The Dow Jones Industrial Average fell 1.2%
- The Stoxx Europe 600 fell 1.2%
- The MSCI World index fell 0.6%
- The Bloomberg Dollar Spot Index fell 0.2%
- The euro rose 0.3% to $1.0638
- The British pound rose 0.4% to $1.2155
- The Japanese yen rose 1.2% to 132.11 per dollar
- Bitcoin rose 6.7% to $26,422.84
- Ether rose 3.6% to $1,718.73
- The yield on 10-year Treasuries declined 17 basis points to 3.41%
- Germany’s 10-year yield declined 19 basis points to 2.10%
- Britain’s 10-year yield declined 18 basis points to 3.25%
- West Texas Intermediate crude fell 3% to $66.29 a barrel
- Gold futures rose 2.2% to $1,982.30 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Robert Brand.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.