Global markets react to Credit Suisse deal as fears hit bank stocks

The European Central Bank (ECB) stuck with its plan to hike interest rates by half a percentage point Thursday, judging that inflation poses a bigger immediate threat to the economy than turmoil in the banking sector.

“The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” the ECB said in a statement.

“The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.”

The move will take the benchmark rate across the 20 countries that use the euro to 3%. The central bank has now hiked rates at six consecutive meetings since July by a combined 3.5 percentage points in a bid to get inflation under control.

“Inflation is projected to remain too high for too long,” the ECB said.

Some analysts had expected the Bank to opt for a smaller hike of a quarter percentage point to reduce the risk of adding further stress to markets. Banking stocks sold off sharply Wednesday as concerns about the sector’s resilience in the wake of Silicon Valley Bank’s demise spread beyond the United States.

The selloff, which dragged Credit Suisse to a new record low, culminated in the embattled lender accepting a loan from Switzerland’s central bank. The lifeline calmed panicked investors and boosted bank stocks Thursday.

US stocks fell Thursday amid ongoing concern about the banking sector and a rate hike decision from the European Central Bank.

Embattled Swiss lender Credit Suisse said that it would borrow $53 billion from the Swiss National Bank to "pre-emptively strengthen its liquidity" after its shares plunged Wednesday. Meanwhile, US federal regulators continue to grapple with how to prevent more fallout from the collapse of Silicon Valley Bank and Signature Bank.

The ECB said Thursday that it would raise the eurozone interest rate by a half point, a decision that could inform investors about the Federal Reserve's own rate hike call next week. The CME FedWatch Tool shows a roughly 72% probability that the US central bank will raise rates by a quarter point.

Investors will also be listening in to Senate testimony from Treasury Secretary Janet Yellen at 10 a.m. ET. In prepared remarks, Yellen said the US banking system "remains sound" and that Americans' bank deposits are secure.

Shares of US banks continued to get battered. Wells Fargo stock fell about 1.3%. Shares of JPMorgan Chase slipped 1.2%.

US home building climbed 9.8% in February from the previous month after five straight months of declines, according to data released Thursday from the Census Bureau. 

The Dow fell about 217 points, or 0.68%.

The S&P 500 slipped 0.6%.

The Nasdaq Composite declined 0.5%.

“The status quo is no longer an option” for embattled bank Credit Suisse, according to a JPMorgan, and the most likely endgame is a takeover by bank UBS.

The investment bank said in a note to investors Thursday that “ongoing market confidence issues” in Credit Suisse — rather than its capital position — had led to a record 24% fall in the lender’s stock Wednesday.

Credit Suisse said it would accept a 50 billion Swiss Francs ($53.7 billion) loan from the Swiss National Bank Thursday to help stay afloat, but JP Morgan said that liquidity injection may not be enough.

“We see a resolution scenario as most unlikely in our view and more likely… a takeover as the most likely scenario especially by UBS,” JPMorgan said.

Three days after US regulators stepped in to rescue the banking sector and two failed banks, Credit Suisse accepted a lifeline to restore confidence in the banking system. Although that calmed some nerves, markets remain extraordinarily volatile.

Focus has shifted again to: Who's next? What's the next domino to fall?

First Republic Bank is the consensus choice. Fitch Ratings and S&P on Wednesday both downgraded the bank's credit rating over concerns that depositors could pull their cash despite federal intervention. The bank is reportedly exploring strategic options, including a sale, according to Bloomberg. (That’s Wall Street for: Help!) First Republic's stock fell 28% in premarket trading.

On Thursday, Fitch Ratings put Western Alliance bank on notice, saying its credit rating could fall if customers continued to pull money out of the bank. Shares of Western Alliance, a regional bank like SVB, fell 10% in premarket trading. PacWest Bank fell 16%, and shares of other regional banks fell again, too. JPMorgan said in a note to clients that the Swiss central bank's intervention was insufficient, and Credit Suisse will most likely need to be taken over.

In the meantime, concerns continue to shift from Credit Suisse to other parts of the banking industry.

The problems at Credit Suisse are "a reminder that as interest rates rise, vulnerabilities are lurking in the financial system," said Neil Shearing, Group Chief Economist of Capital Economics.

Key areas to monitor, Shearing says: Smaller European banks, shadow banks and open-ended funds that might struggle under pressure from customers withdrawing money -- and a boat-load of government bonds in their portfolios that have crumbled in value as rates have surged.

First-time claims for unemployment insurance fell to 192,000 for the week ended March 11, according to data released Thursday by the Department of Labor. 

That's down 20,000 from the prior week's revised total of 212,000.

Continuing claims, which are filed by people who have received unemployment benefits for more than one week, fell to 1.68 million for the week ended March 4, from a revised level of 1.713 million the week before.

Economists were expecting weekly claims to total 205,000 and continuing claims of 1.715 million. 

The steady level of weekly jobless claims, considered a proxy for layoffs, continues to show that companies are reluctant to let go of workers. While the Federal Reserve has been hoping for a softening of the labor market, it continues to prove remarkably resilient.

US home building jumped higher in February, turning around after five consecutive months of falling even as mortgage rates were climbing last month.

Housing starts, a measure of new home construction, rose by 9.8% in February from January. But that's still down 18.4% from a year ago, according to data released Thursday by the Census Bureau. Starts in January rose to a seasonally adjusted annual rate of 1.450 million, up from the revised January estimate of 1.321 million.

Housing starts had big drops in May and July last year, when spiking mortgage rates pushed many prospective home buyers to the sidelines. Starts bounced back slightly in August, but have been falling since then.

Single‐family housing starts in February were up 1.1% from the revised January figure at a seasonally adjusted annual rate of 830,000.

As mortgage rates trended lower from November through January, builders have begun to feel more optimistic that conditions may improve in 2023. But recent strong economic data and uncertainty in the banking sector mean that inflation concerns remain, along with volatile mortgage rates.

Building permits, which track the number of new housing units granted permits, jumped up in February for the second month in a row, rising 13.8% from the revised January rate, and were down 17.9% from a year ago. In February building permits were at a seasonally adjusted annual rate of 1.524 million.

US stock futures are indicating a mixed open this morning as growing concern about the global banking sector and the Federal Reserve's upcoming rate hike decision weigh on investors.

Futures tied to the Dow were down 70 points, or 0.2%, S&P 500 futures were 0.1% lower and Nasdaq Composite futures were up 0.3%.

The ongoing problems in the banking sector continue to weigh on investors in both the US and Europe. Still, US-listed shares of the beleaguered megabank Credit Suisse shot up nearly 5% in pre-market trading after the company announced that it would borrow up to $54 billion from the Swiss National Bank to assure liquidity and restore confidence in the bank. Shares of Credit Suisse fell 14% on Wednesday.

The largest banks in the US -- JP Morgan, Citigroup, Wells Fargo and Bank of America -- also appeared to recover pre-market after a choppy day of trading yesterday.

Regional banks, however, continued to suffer following the collapses of Silicon Valley Bank and Signature Bank. Shares of First Republic Bank were down nearly 30% in pre-market trading after Fitch Ratings and S&P on Wednesday downgraded the bank's credit rating on concerns that depositors could pull their cash despite federal intervention. Bloomberg reports that the bank is considering a number of strategic options, including a possible sale.

Western Alliance Bancorporation was down 11% pre-market and the SPDR S&P Regional Banking ETF (KRE) was down 1.2%.

Wall Street is now anxiously awaiting next week's Federal Reserve policy decision where investors largely expect a quarter percentage point rate hike, according to the CME FedWatch tool.

Investors will also closely watch Treasury Secretary Janet Yellen for information about the state of the banking sector as she testifies before Senate today at 10 a.m. ET.

US officials have seen limited systemic risk exposure from the teetering European bank Credit Suisse and view the bank’s issues as separate and apart from the failure of Silicon Valley bank, despite US bank stocks taking a beating in the market as anxiety continues to grip the industry.

Treasury Department officials spent the day yesterday in constant conversations with their Federal Reserve and European counterparts as they attempted to gauge the risks posed by the long-troubled Swiss lender – and the US exposure to the bank, people familiar with the matter said.

US officials are closely watching the market reaction to the announcement that Credit Suisse would borrow up to 50 billion Swiss francs ($53.7 billion) from the Swiss National Bank to see if it stabilizes the broader anxiety that ripped through the sector Wednesday.

While officials acknowledged the volatile moment – and the reality that broader fears could create significant problems in and of themselves — they continue to see signs that their dramatic emergency intervention last weekend is still showing signs of taking hold.

Fitch Ratings warned investors that Western Alliance, a regional bank caught up in the SVB fallout, could get downgraded.

Western Alliance has cash reserves of $25 billion, equivalent to approximately 47% of total deposits, Fitch noted. The bank has said withdrawals have been "moderate" since the SVB failure, and insured deposits make up more than half of total deposits. That, and the Fed's new lending facility, are positive signs, Fitch said. But stress in the marketplace continues to threaten the company's liquidity.

Shares of Western Alliance tumbled 11% in premarket trading Thursday.

The credit rating agency is the latest to downgrade or threaten a downgrade of a regional bank's credit. Fitch and S&P Global Ratings downgraded First Republic Bank’s credit rating Wednesday on concerns that depositors could pull their cash despite federal intervention to restore faith in the banking sector.

Moody’s Investors Service on Tuesday cut its outlook for the entire US banking sector and placed six US banks on review for potential credit rating downgrades, including Western Alliance.