Bank stocks fall and the S&P 500 falters as Wall Street shakes

Wall Street is worried about what could happen after the second- and third-biggest bank failure in US history, and stocks tumbled wildly Monday as investors struggled to find a safe place to park their money .

The Standard & Poor’s 500 was little changed in morning trading, only after falling 1.4% at open. The sharpest declines again come from the banks. Investors fear that a relentless rise in interest rates to control inflation is approaching a tipping point and potentially crippling the banking system and the economy as a whole.

The US government announced a plan late on Sunday to bail out the banking sector after the collapse of Silicon Valley Bank and Signature Bank since Friday.

The greatest pressure is on regional banks, which are a few steps smaller than the massive, too-big-to-fail banks that contributed to the downturn in the economy in 2007-2008. Shares of First Republic fell 66.3% even after the bank said on Sunday it had bolstered its finances with cash from the Federal Reserve and JPMorgan Chase.

“So far there seem to be few potential problem banks and it is important that this does not extend to the so-called systemically important banks,” said ING analysts.

The broader market held its own as expectations rose that the chaos would force the Fed to ease interest rate hikes that quickly sent the economy. The Dow Jones Industrial Average was up 94 points, or 0.3%, to 32,004 at 10:00 AM ET, while the Nasdaq Composite was up 0.1%. Both erased heavy previous losses.

Equity markets in Asia were mixed after the US government announced its plan to protect bank depositors, but losses mounted as trade moved west through Europe. The German DAX was down 3.3% while banking stocks fell across the continent. On Wall Street, some stock investor fears have reached their highest level since October.

One of the few assets to rise in price was gold as investors looked for anything that looked safe. It was up 2.3% to $1,910.50 an ounce.

Treasury prices also shot up on both demand for something safe and expectations of a looser Fed. That, in turn, pushed their yields down, with the 10-year Treasury yield falling from 3.70% at the end of Friday to 3.51%. This is a big step for the bond market. Earlier this month it was more than 4%.

Two-year rates, which are more in line with the Fed’s expectations, fell even more astonishingly. It fell from 4.59% on Friday to 4.12%.

Some investors are urging the Fed to cut rates quickly to stop the bleeding. The bigger expectation, however, is that the Fed is likely to pause or delay rate hikes.

Traders are betting on a nearly four-in-five chance that the Fed will raise its fund rate by 0.25 percentage point at its next meeting later this month. They are also now betting on a 21% chance of it remaining stable, according to CME Group.

That’s a sharp reversal from early last week, when many traders were counting on the Fed to speed up rate hikes by 0.50 percentage point because inflation was so stubbornly high.

“At this point, depending on financial market reactions and the eventual impact on the wider economy, we are not ruling out that the cycle of rate hikes could even be over and that the next move from Fed officials could be lower. , no higher.” said Kevin Cummins, chief US economist at NatWest.

Higher interest rates can reduce inflation by slowing the economy, but they increase the risk of a later recession. They also hit the prices of stocks and bonds already in investors’ portfolios.

This latter effect is one of the causes of concern for the banking sector. The Fed began raising interest rates almost exactly a year ago, unleashing its strongest storm in decades. The key overnight interest rate is now in the range of 4.50% to 4.75%, an increase of practically zero.

This has hurt the investment portfolios of banks, which often park their money in government bonds because they are considered some of the safest assets in the world.

The collapse of the Silicon Valley bank resonated around the world.

In London, the government arranged for the sale of Silicon Valley Bank UK, the British branch of the California bank, for the face value of one pound, or about $1.20.

Although the bank is small and accounts for less than 0.2% of UK bank deposits according to central bank statistics, it has played a major role in funding tech and biotech startups that the UK government relies on to drive economic growth to stimulate.

Germany’s financial regulator BaFin on Monday banned asset sales and payments from Silicon Valley Bank’s German branch and imposed a moratorium, effectively halting transactions with customers.

Before trading began in Asia, the U.S. Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation said Sunday that all Silicon Valley Bank clients would be protected and have access to their money, and announced steps to notify clients to protect the bank and prevent more bank runs.

Regulators shut down Silicon Valley Bank on Friday as investors withdrew billions of dollars from the bank within hours. Resident Signature Bank is seized after becoming the third-largest bank failure in US history.

AP business writers David McHugh, Yuri Kageyama and Matt Ott contributed to this report.