Wall Street ends sharply lower on bank contagion fears

By Stephen Culp

NEW YORK (Reuters) – Wall Street closed lower on Friday, marking the end of a tumultuous week dominated by an unfolding crisis in the banking sector and the gathering storm clouds of possible recession.

All three indexes closed the session in negative territory. Financial stocks were the most affected by the S&P 500’s major sectors.

The benchmark S&P 500 closed higher than Friday’s close but the Nasdaq, Dow and Dow both posted weekly declines.

SVB Financial Group announced its intention to seek Chapter 11 bankruptcy protection. It is the latest in a series of dramas that began last week with Signature Bank’s collapse and Silicon Valley Bank’s collapse. There have been fears of contagion throughout global banking.

“(The sell-off) is a bit of an overreaction,” Oliver Pursche, Senior Vice President at Wealthspire Advisors New York, said: “However, there is validity to some of the concerns regarding overall liquidity and a potential liquidity crunch.”

These worries have reached Europe with Credit Suisse shares falling on liquidity worries. This has prompted policymakers to scramble for markets to be reassured.

“This goes a lot further than just a run on SVB or First Republic, it goes to the real impact these interest rate hikes are having on capital and balance sheets,” Pursche added. “And you’re seeing it impact large institutions like Credit Suisse, and that’s got people rattled.”

In the past two weeks, the S&P Banking and KBW Regional Banking indexes plunged by respectively 4.6% and 5.4%. These are their largest two week drops since March 2020.

First Republic Bank fell 32.8% after it announced that it would suspend its dividend. This was in response to Thursday’s surge that was sparked by a staggering $30 billion rescue package for large financial institutions.

First Republic’s peers fell 19.0% and Western Alliance fell 15.1%.

Credit Suisse shares that are traded in the U.S. also closed lower at 6.9%.

Investors now focus their attention to next week’s Federal Reserve two-day monetary policies meeting.

An increase in economic activity and recent data suggesting a softening economy have led to investors changing their expectations about the Fed’s interest rate hikes.

“This mini banking crisis has increased the chance of recession and accelerated the slowdown timeline for the economy,” Pursche said. “It’s natural that the Fed should re-examine its course of action, but it’s still very clear that while inflation is slowing it’s still very much a concern and needs to be brought under control.”

According to CME’s FedWatch tool, the financial markets see a 60% chance that the central bank will raise its key rate 25 basis points. The current rate will remain at 39%.

The Dow Jones Industrial Average dropped 384.57 point or 1.19% at 31,861.98, while S&P 500 lost a whopping 43.64 points (or 1.10%) to 3,916.64, while the Nasdaq Composite fell to 11,630.51, or just 0.74%.

Session ended in negative territory for all 11 major S&P 500 sectors.

FedEx Corp rose 8.0% after increasing its fiscal year forecast.

The NYSE had a 4.07-to-1 ratio of declining issues to advancing ones. On Nasdaq however, the ratio was 2.94-to-1 which favors decliners.

S&P 500 recorded 5 new 52-week highs, 20 new lows, and Nasdaq Composite registered 29 new highs.

Volume on U.S. Exchanges was 19.41 trillion shares, which is a significant increase from the 12.49 billion average for the 20 previous trading days.

(Reporting from Stephen Culp in New York; additional reporting by Shubham Btra and Amruta Kandekar in Bengaluru. Editing by Matthew Lewis.

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