Banking woes, Fed keep US investors on edge

Banking sector concerns drive sharp moves in financial stocks after collapse of US lenders

NEW YORK:

Investors are settling in for a long slog in the US stock market in coming months, braced for more tumult in the banking sector and worries over how the Federal Reserve’s tightening will ripple through the economy.

Banking sector concerns drove sharp moves in financial stocks in the United States throughout the week after the collapse of two US lenders and last weekend’s Swiss government-orchestrated takeover of troubled Credit Suisse by rival UBS.

Many worry that other nasty surprises are lurking as the rapid series of interest rate hikes the Fed has delivered over the past year dry up cheap money and widen fissures in the economy.

“The market is very nervous at this point and investors are acting first and looking into the nuances later,” said Wei Li, Global Chief Investment Strategist at fund giant BlackRock. “It’s understandable because it’s not super clear that this is definitely contained.”

In recent days, investors have focused on German giant Deutsche Bank. The company’s shares have lost around more than a quarter of their value this month, including Friday’s 8.5% fall, and the cost of protecting against a default on its bonds soared, even though few put it in a class with Credit Suisse.

“We are not concerned today about counterparty, liquidity issues” with Deutsche, JPMorgan analysts said in a Friday report.

For now, few investors see this year’s events as a repeat of the systemic crisis that swept through markets in 2008, taking down Lehman Brothers and prompting government bailouts of large financial institutions.

But investors are guarded, wary that another bank run could erupt if people believe US or European regulators won’t protect depositors.

“It’s almost like the prisoner’s dilemma where if everyone agrees that they won’t pull their deposits then everything should be okay, but if just one person decides they are getting out then the snowball keeps growing,” said Tim Murray, Capital Market Strategist in the Multi-Asset Division of T Rowe Price, who is underweight equities, focusing on money market accounts that offer yields comparable to Treasuries.

Uncertainty over the Fed’s intentions is amplifying investors’ hesitation in stocks and sparking huge swings in US government bond prices.

The Fed raised rates by 25 basis points on Wednesday but indicated it was on the verge of pausing further increases. Investors piled into the safe haven of US Treasuries, sending yields on the two-year note, which closely reflects Fed policy expectations, to 3.76% this week, the lowest since mid-September.

Published in The Express Tribune, March 26^th, 2023.

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