Traders Dash for Cover as Bank Drama Rattles Globe: Markets Wrap

(Bloomberg) -- Volatility gripped global markets as fresh turmoil at Credit Suisse Group AG days after the collapse of some American regional banks spurred a frantic rush for safety, evoking memories of the 2008 financial crisis and bolstering speculation that policymakers will have to curb their hawkishness to prevent a harsher economic landing.

Equities got some relief after Switzerland’s central bank and financial regulator said Credit Suisse will receive a liquidity backstop if needed — an effort to arrest the slump in confidence around the troubled lender. The S&P 500 pared a slide that topped 2% by more than half. A gauge of US financial heavyweights like JPMorgan Chase & Co. and Citigroup Inc. also trimmed losses, but still hit the lowest since November 2020. First Republic Bank led a rout in US regional peers after being cut to junk by two credit firms.

Wall Street’s so-called fear gauge spiked after being relatively subdued for the most part this year. As investors sought refuge, gold reversed an earlier drop and the dollar rallied against all of its developed-market peers except the Japanese yen. Not every haven asset rose, though, with the Swiss franc sinking more than 2% against the greenback.

Bond yields plunged globally as mounting financial-stability concerns prompted traders to abandon bets on additional rate hikes and begin factoring in cuts by the Federal Reserve. They priced in a drop of more than 100 basis points in the US policy rate by year-end while downgrading the odds of additional tightening by the Bank of England and the European Central Bank.

Banks that trade with Credit Suisse moved to safeguard their finances on Wednesday, snapping up contracts that will compensate them if the turmoil deepens. So intense was the demand for the contracts — known as credit-default swaps — that they spiked to levels that signal the Zurich-based firm is in deep financial distress — something unseen at a major global lender since the throes of the financial crisis.

Read: Recession Risk Mounts as Credit Suisse Crushes Soft-Landing Hope

The renewed bout of banking turbulence spurred some worrisome remarks from prominent Wall Street voices.

As Credit Suisse nosedived, economist Nouriel Roubini — who’s known as “Dr. Doom” — said the troubled lender might be “too big to be saved.” BlackRock Inc.’s Larry Fink noted that the banking crisis could worsen, worrying aloud about cracks in the financial system that formed during more than a decade of easy money and low interest rates. Bridgewater Associates’ Ray Dalio said the recent failure of Silicon Valley Bank was just a “canary in the coal mine.”

“Are the dominoes starting to fall?” Fink, chairman of the world’s largest asset manager, said in a letter on Wednesday. “It’s too early to know how widespread the damage is.”

With the banking turmoil rippling through financial markets, Bob Michele, the chief investment officer of fixed income at JPMorgan Asset Management, warned of an economic hard landing. 

He now expects the Fed to pause rate hikes next week, saying that a recession is “inevitable” and that the best investment strategy right now is to stick to high quality bonds. Michele reckoned the whole Treasury yield curve will come down to as low as 3% by August, but he stopped short of predicting the end of a hiking cycle. The 10-year rate is currently near 3.5%.

Read: Summers Says Fed, ECB to Judge Disinflationary Impulse Scale

Now that’s not to say Wall Street is necessarily embracing the idea of a “financial crisis 2.0” at this stage.

Lisa Shalett at Morgan Stanley Wealth Management stopped short of buying into the latest mega-bear-case on equities — namely that the failure of three American banks would be a prelude to a crisis such as the one that laid global economies low in 2008.

She says the collapse of a few regional lenders was mostly driven by poor risk management at a time when the Fed is aggressively tightening monetary policy to slow the economy. While more banks are likely to fall, Shalett considers the threat to the broad financial industry and economy as contained.

“Remember, in the great financial crisis, there was a lot of this that was about cross-counterparty credit risk,” she told Bloomberg Television. “This is less about immediate contagion.”

No matter how bullish or bearish traders are, there seems to be consensus on at least one thing: volatility should continue dominating the financial world for now amid so many uncertainties.

“The emotions of investors remain high, and shrinking liquidity is pouring gasoline on volatility in the equity and bond market,” said Mark Hackett, chief of investment research at Nationwide. “The market remains susceptible to continued pressure until confidence in the system returns.”

Key events this week:

• Eurozone rate decision, Thursday
• US housing starts, initial jobless claims, Thursday
• Janet Yellen appears before the Senate Finance Committee, Thursday
• US University of Michigan consumer sentiment, industrial production, Conference Board leading index, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.7% as of 4 p.m. New York time
• The Nasdaq 100 rose 0.4%
• The Dow Jones Industrial Average fell 0.9%
• The MSCI World index fell 1.1%

Currencies

• The Bloomberg Dollar Spot Index rose 0.9%
• The euro fell 1.4% to $1.0580
• The British pound fell 0.8% to $1.2060
• The Japanese yen rose 0.8% to 133.21 per dollar

Cryptocurrencies

• Bitcoin fell 0.9% to $24,406.63
• Ether fell 3.1% to $1,651.65

Bonds

• The yield on 10-year Treasuries declined 22 basis points to 3.47%
• Germany’s 10-year yield declined 29 basis points to 2.13%
• Britain’s 10-year yield declined 17 basis points to 3.32%

Commodities

• West Texas Intermediate crude fell 4.5% to $68.09 a barrel
• Gold futures rose 0.5% to $1,921.40 an ounce

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