Investors Turn Cautious Amid Growing Bank Fears and Looming Debt Ceiling Turmoil

Barry Adams
04 May, 2023
New York City

Stocks struggled a day after the Federal Reserve raised interest rates causing more stress on the battered regional banks' balance sheets. 

Benchmark indexes traded down and regional banks declined sharply on the growing realization that the regional banking crisis is not likely to go away anytime soon.   

The ETF tracking regional banks, KRE, declined 5% reflecting investor's uneasiness with the sector.  

PacWest plunged more than 40% on the news that the California bank is evaluating its strategic options including company sale. 

First Horizon Corp tanked 38% after TD Bank terminated its plan to acquire the Tennessee-based bank citing possible regulatory delays for its merger plan. 

Zions Bancorp declined 15.6% and Western Alliance Bancorp dropped 45.6%.   

Banks of all sizes are carrying significant unrealized losses in their Treasury securities assets and banks with large percentage of deposits above the FDIC insured levels are especially vulnerable to sudden deposit outflows. 

At the end of 2022, the FDIC estimated $622 billion in losses in Treasury debts held by banks of all sizes. 

Stress in the regional banks is likely to worsen in the coming weeks and the crisis may persist well into 2024 as long as the Federal Reserve continues to hike rates or hold rates at elevated levels. 

On Wednesday, the Federal Reserve lifted the fed funds rate by 25 basis points to a new range between 5.0% and 5.25% and left its door open for a potential rate pause at the next meeting. 

The rate uncertainty was compounded by growing anxieties about the U.S. lawmakers' failure in lifting the debt ceiling. 

The U.S. Treasury is expected to run out of cash as early as June and without the increase in debt ceiling the government operations may have to be closed for an unknown period.

 

U.S. Indexes & Yields 

The S&P 500 index fell 0.6% to 4,065.10 and the Nasdaq Composite decreased 0.4% to 11,971.97.

The yield on 2-year Treasury notes declined to 3.86%, 10-year Treasury notes edged down to 3.37% and 30-year Treasury bonds held at 3.72%. 

Crude oil fell 21 cents to $68.39 a barrel and natural gas prices fell 6 cents to $2.10 a thermal unit. 

 

U.S. Stock Movers 

PacWest Bancorp tanked 56.8% to $2.77 on the report that the company is looking for capital infusion, merger partner or the sale of the bank. 

Zions Bancorp dropped 13.9% to $19.51 and Western Alliance declined 38.5% to $18.05. 

First Horizon Crop plunged 37.6% to $9.42 after Canada-based TB Bank terminated its merger plan on the regulatory delay worries. 

Johnson & Johnson decreased 0.4% to $162.34 after the company completed its spinoff of its consumer health unit Kenvue. 

The company priced public offering of 172.8 million shares at $22.0 a share. Kenvue jumped 18.2% to $26.15. 

Peloton Interactive Inc declined 13.7% to $7.62 after the company reported wider-than-expected loss. 

Shopify Inc soared 27.9% to $59.16 after the e-commerce platform operator reported better-than-expected earnings. 

The Canada-based company also announced its plan to lay off 20% of its staff. 

Paramount Global Class A plunged 23.4% to $19.81 after the parent of Paramount Pictures and CBS network reported weaker-than-expected earnings. 

The company also slashed its dividend to 5 cents from 24 cents per common stock as the company "moves toward streaming profitability."

Revenue in its film studio division declined 6% and television and cable properties including MTV and Comedy Central fell 8% to $5.2 billion. 

Paramount said revenue in its streaming service unit, which includes Paramount+ and Pluto TV, rose 39% to $1.5 billion but losses expanded to $511 million from $456 million in the previous year. 

 

European Stocks Turn Lower, 7th Rate Increase In Europe 

European markets turned lower and the European Central Bank hiked its reference rate by 25 basis points. 

Benchmark indexes in Paris and Frankfurt declined after investors digested the latest rate hike decision by the European Central Bank and the U.S. Federal Reserve. 

Indexes in London edged down following weak commodities prices and crude oil drifted to a new 5-week low. 

 

ECB Hikes Rates by 0.25%, Halts APP Reinvestments

The European Central Bank increased its reference rate by 25 basis points after lifting rates by 50 basis points for three times in a row. 

After the hike, the main refinancing facility rate increased to 3.75%, marginal lending facility to 4.0% and deposit facility to 3.0%  effective May 10. 

In addition, the Governing Council decided to discontinue its reinvestment of cash maturing bonds purchased under the Є3.2 trillion Asset Purchase Program from July. 

The balance in the program is declining by Є15 billion a month.  

Policymakers noted that the headline inflation has been declining but underlying price pressures remain strong.  

"At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain," the ECB statement released after the meeting noted.     

 

Europe Indexes & Yields 

The DAX index decreased 0.5% to 15,734.24, the CAC-40 index fell 0.9% to 7,304.77 and the FTSE 100 index fell 1.1% to 7,702.64. 

The yield on 10-year German Bunds inched up to 2.26%, French bonds traded slightly higher to 2.86%, the UK gilts inched higher to 3.71% and Italian bonds advanced to 4.17%.

The euro edged higher to $1.106, the British pound to $1.257 and the Swiss franc to 88.50 cents.

Brent crude fell 5 cents to $72.28 a barrel and the Dutch TTF natural gas decreased €0.83 to €35.96 per MWh.

 

Europe Stock Movers 

ArcelorMittal SA declined 2.2% to €25.06 after the French steel maker reported a decline in sales and earnings in its latest quarter. 

Volkswagen Group increased 0.3% to €124.62 after the German automaker reported higher sales and the company confirmed its 2023 outlook. 

Casino Guichard Perrachon SA dropped 10.9% to €7.46 after the French retailer said sales declined in its latest quarter. 

Adecco Group AG decreased 2.5% to CH 28.65 after the Swiss staffing company reported mixed quarterly results.  

Novo Nordisk AS dropped 4.6% to kr1,069.0 after the Danish pharmaceutical company said it may curtail sale of its starter weight loss drug Wegovy to new customers. 

Revenue in the quarter increased to $7.69 billion and net income was $2.86 or $1.27 per share. 

Shell Plc increased 1% to 2,348.0 pence after the UK-based energy company reported higher-than-expected quarterly earnings despite the fall in energy prices.