Fear about the unseen risks to the financial system rippled across the globe on Wednesday, breaking the brief calm that had settled over markets the day before and deepening concerns about the potential for a banking crisis to threaten the economy.
Wednesday’s turmoil was set off by a panic over the health of Credit Suisse, the 166-year-old Swiss bank that has been reeling from years of mismanagement and poor risk control; on Tuesday, the bank had warned of problems in its accounting practices. Though different to the woes of the American banks that collapsed in recent days, concern about Credit Suisse served only to add to a sense of dread that more problems could be lurking. Late in the day on Wednesday, Switzerland’s central bank said it would step in if it needed to.
Though the S&P 500 ended with a decline of just 0.7 percent, after recovering from a larger fall earlier in the day, trading in bond and commodities markets signaled that investors were worried about the economy: Oil prices slid to their lowest levels in more than a year, while yields on U.S. government bonds also lurched downward.
“This is morphing into a bigger deal,” Priya Misra, head of global rates strategy at TD Securities, said, explaining the drastic moves in markets on Wednesday. “If this is not resolved quickly, we should talk about a deep recession as the base case — nobody was talking about a deep recession before.”
The moves dumbfounded some investors, who consider the economies in the United States and elsewhere as more solid than the turmoil suggests. They attributed the chaotic trading to the fact that investors were worried that it might be difficult to spot risks lurking after an unusually fast increase in interest rates over the past year. The moves also highlighted the fragility of the financial markets when investors lose their grasp of what could happen next.
This year was already going to be an unpredictable one for the economy and the markets, coming after a tumultuous 2022, but “that uncertainty has only gone higher,” said Dan Ivascyn, the chief investment officer of Pimco, the bond-fund manager with roughly $2 trillion in assets.
Wall Street has been on edge ever since the collapse of Silicon Valley Bank and Signature Bank, which were seized by regulators after suffering devastating runs on deposits. Policymakers have sought to contain the risks by backstopping lenders, and although those efforts have helped ease concerns, Wednesday’s trading showed that the anxiety isn’t fully resolved.
Credit Suisse’s shares plunged to a new low after the bank’s largest shareholder, Saudi National Bank, ruled out providing it more money as it struggles with its latest turnaround plan. The Swiss National Bank said it stood ready to support Credit Suisse if necessary, but not before shares across Europe were also hard hit, with stocks of many of the region’s biggest banks falling sharply.
Rating agencies have noted that the European banks have less exposure to the same risks that took down small lenders in the United States, while investors took some comfort from the swift action taken by the authorities around the world.
“We think there is a reasonable chance you see some stabilization,” said Mr. Ivascyn. “But there are going to be aftershocks. We think we are in a volatile environment for the next several months.”
Shortly before the markets opened in the United States, S&P Global Ratings cut the credit rating of First Republic by several notches, into so-called junk territory. The agency said that the risk of deposit withdrawals was “elevated,” noting that the bank’s $176 billion deposit base is more concentrated than many other banks, with a large share commercial clients holding balances above the $250,000 limit insured by the government.
First Republic Bank skidded 21 percent on Wednesday and PacWest Bancorp, another bank whose shares have recently come under pressure, fell 13 percent, with the volatility triggering temporary halts in trading at various points during the day.
The ructions in financial markets were set against the concerning crosscurrent of a brewing financial crisis while damaging inflationary pressures remain. The prescribed cure for high inflation — higher interest rates — has also contributed to some banks’ ailing health.
Central bankers in the eurozone meet on Thursday to decide whether or not to keep raising interest rates in light of the ensuing turmoil, and until recently had been expected to keep aggressively pushing rates higher. That meeting will be followed by the Federal Reserve’s, which will happen next week.
Andrew Brenner, the head of international fixed income at National Alliance Securities, said that the Fed “is nuts if they think they can tighten.” The central bank “will break the bank system if they keep thinking like this,” he added.
The yield on the two-year Treasury note, which is particularly sensitive to Fed policy, fell by about a third of a percentage point, a big move for that asset, to around 3.9 percent. Futures markets on Wednesday suggested investors were split on whether the Fed will raise rates by a quarter-point at their next meeting or whether they will alter their previously expected course and keep interest rates where they are.
“They can and should entertain that possibility,” said Kristina Hooper, chief global market strategist at Invesco. “This is not a fait accompli. This does not have to end in a major financial crisis.”
Investors in futures markets also piled into bets that the Fed will begin cutting rates in the second half of the year — a clear sign that they think the escalating crisis may force the central bank’s hand. The Fed had repeatedly said it had no plans to cut rates this year, though that was before the latest turmoil.
And in debt markets, where banks and other investors facilitate loans to companies across the world, investors’ fears were reflected in sliding bond and loan prices. The moves amplified concerns about the potential knock-on effect from stress in the banking sector, and among some start-up tech companies, leading to some companies being unable to repay their debts.
“At this point,” said Cindy Beaulieu, chair of the investment policy committee at the asset manager Conning, “we don’t think we have broken things, but there are definitely some cracks.”
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