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Markets shuddered Wednesday on worries about a spreading banking crisis and how badly it will hit the global economy, with stocks and bond yields falling on both sides of the Atlantic.

The S&P 500 sank as much as 2.1% before ending the day with a loss of 0.7%, while markets in Europe fell more sharply as shares of Switzerland’s Credit Suisse dropped to a record low. The Dow Jones Industrial Average lost 280 points, or 0.9%, after dropping as much as 725 points. The Nasdaq composite rose 0.1% after erasing a steep decline.

The TSX fared even worse than Wall Street, as a big drop in oil prices pressured the energy sector, while the heavily weighted financial sector also saw another day of steep declines. The S&P/TSX Composite Index lost 1.6%, only modestly off its lows for the session, as oil sank to its lowest level in more than a year.

U.S. stocks trimmed their losses toward the end of the day as the Swiss National Bank said it could provide some assistance to Credit Suisse “if needed.”

But that came only after a steep drop for Credit Suisse rattled investors worldwide. Its shares in Switzerland sank 24.2% following reports that its top shareholder won’t pump more money into its investment. The bank has been fighting troubles for years, including losses it took related to the 2021 collapse of investment firm Archegos Capital.

“They’ve had issues,” said Anthony Saglimbene, chief market strategist at Ameriprise. “It’s just coming at a time when there’s more uncertainty and there’s less confidence in the banking system.”

Wall Street’s harsh spotlight has intensified across the banking industry recently on worries about what may crack next following the second- and third-largest bank failures in U.S. history over the last week. Stocks of U.S. banks tumbled again Wednesday after enjoying a brief, one-day respite on Tuesday.

The heaviest losses were focused on smaller and midsize banks, which are seen as more at risk of having customers try to pull their money out en masse. Larger banks also fell, but not by quite as much.

First Republic Bank sank 21.4%, a day after soaring 27%. JPMorgan Chase slid 4.7%.

Many analysts are quick to say the current weakness for banks looks nowhere near as bad as the 2008 crisis that torpedoed the global economy. But worries are nevertheless rising that pain spreading through the banking system could spark a downturn.

“When you have worries about contagion and a financial crisis, there is increasing risk of a global recession,” Saglimbene said, pointing to the first drop in the price of U.S. crude oil below $70 per barrel since late 2021. A weaker economy would burn less fuel.

“The regional banks are so important to small businesses, midsized businesses” by providing loans, he said. “They’re a centerpiece of the economy.”

Much of the damage for banks is seen as the result of the Federal Reserve’s fastest barrage of hikes to interest rates in decades. The Fed has pulled its key overnight rate to a range of 4.50% to 4.75%, up from virtually zero at the start of last year, in hopes of driving down painfully high inflation.

Higher rates can tame inflation by slowing the economy, but they raise the risk of a recession later on. They also hurt prices for stocks, bonds and other investments. That latter factor was one of the issues hurting Silicon Valley Bank, which collapsed Friday, because high rates forced down the value of its bond investments.

The Fed’s fusillade of rate hikes over the year have shocked the system following years of historically easy conditions. In his annual letter to investors, BlackRock CEO Larry Fink pointed to prior eras of rising rates that led to “spectacular financial flameouts,” such as the yearslong savings and loan crisis.

“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming,” he wrote.

Some of this week’s wildest action has been in the bond market, where traders are rushing to guess what all the chaos will mean for future Fed action. On one hand, stress in the financial system could push the Fed to hold off on hiking rates again at its meeting next week, or at least refrain from the larger rate hike it had been potentially signaling.

On the other hand, inflation is still high. While taking it easier on interest rates could give more breathing space to banks and the economy, the fear is such a move by the Fed could also give inflation more oxygen.

Weaker-than-expected economic reports released Wednesday may have allayed some of those worries. One showed that inflation at the wholesale level slowed by much more last month than economists expected. It’s still high at a 4.6% level versus a year earlier, but that was better than the 5.4% that was forecast.

Other data showed that U.S. spending at retailers fell by more than expected last month. Such data could raise worries about a recession on the horizon, but they may also take some pressure off inflation in the near term.

That caused the yield on the two-year Treasury to plummet. It tends to track expectations for the Fed, and it dropped to 3.89% from 4.25% late Tuesday. That’s a massive move for the bond market. The two-year yield was above 5% just a week ago, at its highest level since 2007.

Canadian bonds, as per normal, largely tracked those moves. By late afternoon, the Canada five-year bond - heavily influential on the setting of fixed mortgages rates - was down 16 basis points to 2.87%, retesting its lows of mid-January.

The volatility in global credit markets has dramatically impacted where money markets are placing bets on the next Bank of Canada rate setting, although these bets are seeing large swings day to day. Interest rate probabilities based on overnight swaps trading suggest a 60% chance of a quarter of a percentage point cut at the central bank’s next meeting in April. These same markets are pricing in a full 75 basis points of cuts in the bank’s trend-setting interest rate by this fall. Just a week ago, they were pricing in another interest rate hike this year.

The TSX closed down 315.32 points, to 19,378.84. Financials lost 1.8%.

But the energy sector took the brunt of the losses, losing 5.4% as oil prices plunged more than US$5 a barrel on Wednesday, as unease over Credit Suisse spooked world markets and offset hopes of a Chinese oil demand recovery.

“It doesn’t matter what your risk asset is: at this point people are pulling the plug across different instruments here,” said Robert Yawger, director of energy futures at Mizuho in New York. “Nobody wants to go home with a big position on anything today. ... You have nowhere to hide really.”

Both crude benchmarks hit their lowest since December 2021 and have fallen for three straight days.

Brent crude was down $3.76, or 4.9%, to $73.69 a barrel. U.S. West Texas Intermediate crude (WTI) was down $3.72, or 5.2%, at $67.61, breaking through technical levels of $70 and $68 and extending the sell-off.

Volatility in Brent and WTI was at its highest in more than a year and both entered technically oversold territory on Wednesday.

On Tuesday, both benchmarks shed more than 4%, pressured by fears that the collapse of Silicon Valley Bank (SVB) last week and other U.S. bank failures could spark a financial crisis that would weigh on fuel demand.

Hedge funds were liquidating due to rising interest rates and economic uncertainty, said Dennis Kissler, senior vice president of trading at BOK Financial, adding that heavy pressure on U.S. stocks early Wednesday was adding to the fund liquidation in crude.

The U.S. dollar also strengthened against a basket of currencies, making it more expensive for holders of those currencies to purchase crude.

Adding to the bearishness in the market, U.S. crude stockpiles rose by 1.6 million barrels last week, government data showed, more than the expected rise of 1.2 million barrels in a Reuters poll of analysts.

In Europe, indexes tumbled on weakness from banks. France’s CAC 40 dropped 3.6%, and Germany’s DAX lost 3.3%. The FTSE 100 in London fell 3.8%.

On Wall Street, companies in the oil and gas business had the sharpest stock drops. Helping to cushion the blow were gains for several Big Tech stocks. They’ve had their own struggles recently, but they tend to benefit from lower interest rates.

All told, the S&P 500 fell 27.36 points to 3,891.93. The Dow lost 280.83 to 31,874.57, while the Nasdaq rose 5.90 to 11,434.05.

Europe's bank stocks came under pressure again on Wednesday (March 15), with Credit Suisse tumbling to a new low, as investors continued to worry about stresses within the sector following Silicon Valley Bank's collapse.


The Associated Press, Reuters, Globe staff

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