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Wall Street stocks rose on Monday after US President Joe Biden sought to reassure that the US banking system is sound following the collapse of two lenders, but European stocks plunged.
Meanwhile, US bond yields fell as investors judged the turmoil in the regional banking sector could push the Federal Reserve to become gun-shy on raising interest rates, a move which would be positive for stocks but pushed down the dollar.
After opening lower, Wall Street rebounded into positive territory after about an hour of trading, with the Dow up 0.5 per cent in midday trading.
Biden said “Americans can have confidence that the banking system is safe” as he vowed to push for tougher regulations on banks.
Fears that the collapse of Silicon Valley Bank (SVB) could spark contagion throughout the banking system forced the Fed, the Treasury Department and Federal Deposit Insurance Corp over the weekend to promise to fully protect all depositors and give backup to any lenders struggling to find cash, providing easier terms on short-term loans.
On Sunday, New York regulators said they had closed another lender, Signature Bank.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said all the news about contagion risk “will likely interfere with Federal Reserve rate hike expectations, as well, as the Fed may want to think twice before stepping on the gas this month.”
Briefing.com analyst Patrick O’Hare said the market is now showing an even chance of no rate hike at next week’s Fed policy meeting.
After Fed chief Jerome Powell’s remarks to lawmakers last week, over three-quarters of investor forecast a 0.5-percentage-point hike in rates, O’Hare said.
“The prospect of further interest rate hikes has certainly receded today, but the real focus for now is on worrying about how far the crisis will spread,” said Chris Beauchamp, chief market analyst at online trading platform IG.
The Fed’s sharp jump in interest rates, which sought to tame inflation, helped provoke SVB’s collapse as the prices for securities on its books fell below their purchase price — and this could be a problem for other banks.
Shares in First Republic Bank tumbled 66 percent, PacWest Bancorp 32 percent, KeyCorp 29 percent and Comerica 25 percent in midday trading.
“The Fed is now in question over even a 25-point hike at the next meeting,” Strategic Alpha analyst Maurice Pomery told AFP.
“The issue for me is that many businesses were constructed on zero interest rates, leverage and debt model — which with rising rates is no longer viable,” he warned.
Fears about contagion dominated trading in Europe.
Germany’s finance watchdog insisted the collapse of SVB posed no threat to financial stability, as did the French central bank.
France’s Finance Minister Bruno Le Maire told investors to “calm down” after shares in French banks tumbled.
Shares in French banks BNP Paribas fell 6.8 per cent and Societe Generale 6.2 per cent. Italy’s Unicredit tumbled nine per cent and Spain’s Santander 7.4 per cent. Deutsche Bank shares fell 4.9 per cent.
The Paris and Frankfurt stock markets closed around three percent lower while Milan fell four per cent. London was down 2.6 per cent.
“Far from calming nerves, fear of contagion has ramped up further with investors dumping risk assets across Europe,” City Index analyst Fiona Cincotta told AFP.
“Banks are leading the charge southwards with investors taking aim at Spanish and Italian banks, suggesting that these are considered the weakest links as fears rise.”
New York - Dow: UP 0.5 per cent at 32,068.85 points
New York - S&P 500: UP 0.5 per cent at 3,882.54
New York - Nasdaq Composite: UP 1.2 per cent at 11,266.86
London - FTSE 100: DOWN 2.6 per cent at 7,548.63 (close)
Frankfurt - DAX: DOWN 3.0 per cent at 14,959.47 (close)
Paris - CAC 40: DOWN 2.9 per cent at 7,011.50 (close)
Milan - FTSE MIB: DOWN 4.0 per cent at 26,183.54 (close)
EURO STOXX 50: DOWN 3.1 per cent at 4,096.54 (close)
Tokyo - Nikkei 225: DOWN 1.1 per cent at 27,832.96 (close)
Hong Kong - Hang Seng Index: UP 2.0 per cent at 19,695.97 (close)
Shanghai - Composite: UP 1.2 per cent at 3,268.70 (close)
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