Upheaval in financial markets continued on Thursday, as investors balanced pockets of turmoil emanating from the banking industry against some semblance of stability returning to the broader market.
The S&P 500 opened with a drop, before quickly rallying to a gain of more than 1 percent by midday. The Stoxx 600 index, which tracks shares of the biggest companies in Europe, gained roughly 1.4 percent.
Those headline moves masked the pain still being felt among investors in some of America’s smaller lenders, following a cascade of panic that was set in motion last week by the failure of Silicon Valley Bank. Whipsaw moves added to the challenging trading conditions across markets.
Despite the rally on Thursday, investors remain on tenterhooks, braced for further stress stemming from the substantial shift away from a decade of low interest rates that has unearthed hidden weaknesses in the financial system.
“Until this week, markets had broadly ignored the threats that tightening policy was starting to uncover,” said Seema Shah, chief global strategist at Principal Asset Management. “The latest turmoil, however, has quickly reminded investors that risk assets simply cannot escape the wrath of monetary tightening.”
First Republic Bank, a regional lender that has come into investors’ cross-hairs, lost a fifth of its value, even after rallying back from steeper losses following reports that large banks stand ready to support the beaten down bank.
First Republic is on course to record its fifth double-digit percentage decline in six days and has lost more than 80 percent of its value in the stock market this month, wiping roughly $20 billion from its valuation in that period. PacWest, which primarily operates out of California, slumped more than 14 percent.
Other banks, like Western Alliance and Zions, also slipped but by more moderate, single digit amounts.
But in a reflection of the mounting concern about the longer term fallout from the events of the past week, Goldman Sachs raised its odds that the U.S. economy would slip into recession over the next 12 months, “reflecting increased near-term uncertainty around the economic effects of small bank stress.”
Energy stocks were also under pressure, following a swift slide in the price of oil on Wednesday, which is sensitive to the prospect of a global downturn sapping demand for the commodity. Exxon Mobil and Halliburton both dropped more than 1.5 percent on Thursday. The price of a barrel of West Texas Intermediate crude oil, the American benchmark, fluctuated around its lowest level since the end of 2021.
However, broader markets appeared more settled, largely shrugging off a 0.5 percentage point rate increase from the European Central Bank, and taking solace from a rebound in the share price of Credit Suisse, the embattled European bank, after it said it would tap a lifeline from the Swiss central bank and borrow up to $54 billion.
Shares of Credit Suisse jumped more than 15 percent, recovering some of the steep loss from the day before that stoked fear about the lender’s financial health. Other banks in the region, continued to drop, however: Deutsche Bank fell 5 percent, Société Générale dipped 1.4 percent and BNP Paribas nudged 0.4 percent lower.
The European Central Bank stuck to its plans and raised interest rates by half a percentage point despite expectations the central bank might flinch in the face of sustained pressure on banks on both sides of the Atlantic.
Central banks have been raising interest rates to try to rein in inflation, but higher rates also mean higher costs for companies, contributing to the pain experienced by some banks in recent days.
Central bankers must now balance the desire to continue slowing inflation with the potential for it to risk further instability in financial markets. Analysts noted that the European Central Bank’s decision took on heightened importance ahead of the Federal Reserve’s meeting next week, and yields on some U.S. government bonds rose, as investors bet that the Fed would follow the E.C.B. in raising its benchmark rate next week.
Still, traders in futures markets continued to bet that the Fed will cut interest rates later this year as inflation continues to fall and the economy continues to deteriorate, even though the central bank and its chair, Jerome H. Powell, have so far said that there are no plans to do so.
“The balance of risks has undoubtedly shifted,” noted Daleep Singh, chief global economist at PGIM Fixed Income. “The risks from too much tightening are now at least equal to, and likely larger than, the risks of doing too little. We expect Fed Chair Powell to pair a final rate hike next week with a message that Fed policy will then go on an extended pause, with the possibility of resuming rate hikes later — or initiating rate cuts — in the second half of the year.”
Jin Yu Young and Vivek Shankar contributed reporting.