Stocks tumbled Tuesday as fears over the health of the financial sector following the collapse of First Republic Bank collided with broader concerns stemming from signs of a slowing economy.
Some regional banks, which have been under pressure since the collapses of Silicon Valley Bank and Signature Bank in March, suffered significant setbacks on Tuesday, shaking the relative calm that reigned after the First Republic seized by regulators and sold to JPMorgan Chase on Monday had been.
PacWest stock shed more than 20 percent of its value, its worst one-day drop since the peak of the banking turmoil in March. Western Alliance fell nearly 20 percent, while Comerica and Zions Bank both posted double-digit percentage declines.
The moves came amid data showing US manufacturers received fewer-than-expected new orders in March and a continued slowdown in the labor market this month, with job vacancies falling and layoffs rising. Oil prices also fell sharply as prospects of an economic downturn would likely lower energy demand. The price of a barrel of Brent crude, the international benchmark, fell to around $76, near its lowest for the year.
The S&P 500 lost 1.3 percent. Energy stocks fell the most, with the sector as a whole falling more than 4 percent, followed by financials, down about 2.5 percent.
“The banking problem will continue,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “I never believed the idea that handing First Republic over to JPMorgan would end this. There is a real fear of instability and an economic slowdown.”
Investors also expressed concern about Wednesday’s Federal Reserve meeting, when the central bank is expected to hike interest rates. The Fed has been quick to raise interest rates over the past year in an attempt to cool the economy and curb stubbornly high inflation. But higher interest rates were also at the root of the problems at the banks.
Some investors fear that raising rates even higher could trigger another wave of turmoil as consumers switch bank deposits, which pay relatively low interest rates, to alternatives such as money market funds that offer higher yields. To keep customers, banks could offer higher interest rates on deposits, but that eats into their profit margins.
“So far the Fed has looked rather dull,” said Kristina Hooper, chief strategist for global markets at Invesco. “They are so focused on inflation, which is a rear-view mirror issue, rather than on the damage they could cause by raising rates further.”
Based on market prices, investors continue to expect the Fed to hike rates by a quarter point on Wednesday. But that conviction has weakened somewhat as bets are trending towards rate cuts as early as September, an outcome likely only if inflation falls sharply or the economy slides into a deep recession.
The two-year Treasury yield, which is sensitive to changes in interest rate expectations, fell nearly a fifth of a point to below 4 percent on Tuesday, a big move for an asset that normally moves hundredths of a point every day.
Elsewhere, a survey of bank lending conditions released Tuesday by the European Central Bank showed that euro-zone lenders are pulling back from lending at a faster rate than at any time since the 2011 European debt crisis concerns about a credit crunch putting pressure on the economy are growing.
Adding to the bleak outlook, US lawmakers have yet to agree a deal to raise the ceiling on the amount of debt the government can take on, with government officials warning it could run out of money by June.