Banking stocks took a hit on Friday, led by Germany’s Deutsche Bank, as policymakers struggled to calm nerves after setbacks on both sides of the Atlantic.
The Stoxx 600 index of European banks, which includes the region’s largest lenders, fell 4.6%, outpacing weakness in major national indexes, led by an 8.5% decline in Deutsche shares. Commerzbank shares fell 5.5% as jitters across the sector persisted following the collapse of two regional US institutions and a bailout deal for Credit Suisse in recent weeks .
Big US banks were also under pressure, with JPMorgan, Goldman Sachs and Citi all down more than 1% by mid-afternoon in New York, while Morgan Stanley lost 2.6%.
Troubled regional lender First Republic Bank swung between losses and gains and last traded 0.8% lower. However, gains from peers including Zion sent the KBW Regional Banking Index up 2.8% on the day.
“Obviously the main question is: what will be the next shoe to drop?” said Kevin Thozet, member of the Carmignac investment committee. “What we are seeing is market participants trying to test where the next weak link in the banking sector is.”
Depressed sentiment in the banking sector and fears of contagion continued to weigh on broader markets. The U.S. benchmark S&P 500 index posted moderate gains, adding 0.3%, while the Nasdaq Composite was flat. Meanwhile, the global Stoxx 600 gauge in Europe closed the day down 1.4%.
Banking stocks had a turbulent March as traders worried about the blow to lenders from aggressive central bank interest rate hikes last year.
“Europe is very tilted towards the banks, which have been in the eye of the storm,” said Emmanuel Cau, head of European equity strategy at Barclays. “There are bank-specific issues to worry about, such as regulation and deposit security.”
Deutsche’s decline came after an increase this week in the cost of insuring the lender’s debt against default.
The price of the bank’s five-year credit default swaps – derivatives that act like insurance and pay out if a company defaults on its payment obligations – fell from 134 basis points on Wednesday to 200 basis points on Friday , according to data from Refinitiv.
Global authorities have tried to ease investor concerns after several U.S. regional banks failed and last weekend’s hasty takeover of Credit Suisse by rival UBS.
“Deutsche Bank has fundamentally modernized and reorganized its business and is a very profitable bank,” German Chancellor Olaf Scholz said on Friday, after being asked if the lender was the “new Credit Suisse”. “There is no reason to worry about it.”
European Central Bank President Christine Lagarde told a eurozone summit in Brussels that the banking sector was “strong” and the ECB was fully equipped to provide liquidity to the eurozone financial system if necessary, according to an EU official.
She insisted there was “no trade-off” between controlling inflation and promoting financial stability.
U.S. Treasury Secretary Janet Yellen said on Thursday that regulators were “ready to take additional steps if necessary” to ensure the safety of bank deposits. But efforts to stem the sale have so far had only fleeting effects.
Eurozone, US and UK central banks have all continued to hike interest rates to combat stubbornly high inflation this month, despite the banking sector turmoil, which is itself same in part the result of rapidly rising borrowing costs over the past year. On Friday, Fed officials doubled down on their decision to raise rates by a quarter point despite tensions in the banking sector.
“There is still a nagging question among market participants whether the turmoil in the banking sector is over or if there will be a wider contagion,” said Mobeen Tahir, director of macro research and tactical solutions. at WisdomTree Europe.
“It is also now clear to central banks that the turmoil is not going to be a major drag on their monetary policy actions – it sends jitters to markets as it could exacerbate or expose new vulnerabilities in the banking sector.”
Dirk Willer, strategist at Citigroup, said it was “too early to tell” whether stress in the banking sector would impact the broader US economy. But he added that the Federal Reserve and the ECB had “become more cautious” about tightening monetary policy. He predicted that the United States was likely to enter a recession this year, noting that “banking stress is tightening credit”.
Economists now expect the Fed to pause its rate hike cycle, keeping rates unchanged at its next meeting in May before cutting them in September, while pricing in a 0.25 percentage point hike from at the ECB meeting and no decline in 2023.
Additional reporting by Guy Chazan in Berlin