A reversal in the bank selloff that shook markets on Friday fueled a rally in stocks, which also gained amid assurances from authorities about financial stability and growing speculation that policymakers will have to stop raising interest rates to avoid a recession.
ECB President Christine Lagarde attempted to assuage fears by telling EU leaders that the eurozone banking sector was resilient and that the central bank’s toolkit was ready to provide liquidity to the financial system if needed. Leading US regulators also sought to reassure depositors and investors alarmed by recent bank collapses by stating on Friday that while some banks are experiencing stress, the overall financial system is still stable.
On Friday, the Dow Jones finished more than 130 points higher, while the S&P 500 and Nasdaq gained nearly 0.56% and 0.31%, respectively. The US stock market rallied despite concerns about banking sector instability.
“Concerns about Deutsche Bank intensified existing banking fears, causing equities for U.S. regional banks such as PacWest Bancorp, Western Alliance Bancorp and KeyCorp to drop at least 3% during morning trading before recovering. Shares of First Republic Bank, which is in the process of being shored up by a group of banks under the leadership of JP Morgan Chase CEO Jamie Dimon, fell more than 6%. The banking turmoil occurs as UBS is acquiring failed Credit Suisse, and U.S. regulators are assessing the failures of Silicon Valley Bank and Signature Bank,” says José Torres, Senior Economist at Interactive Brokers.
Deutsche Bank’s US-listed shares were down only 3.1% after falling 14% earlier in the session. Deutsche Bank announced that it would redeem $1.5 billion in tier 2 notes due in 2028, causing a market panic and sending European banking stocks plummeting.
Here’s what transpired with Deutsche Bank – “Credit default swaps serve to protect the bank’s bond holders from a possible default. The increased costs of default protection sent Deutsche shares down for the third consecutive day, resulting in the securities losing nearly a fifth of their value,” informs Torres.
Investor trust in a number of institutions has been dwindling, despite claims by officials that banks are well capitalised from Washington to Frankfurt to Zurich. First Republic Bank of California has had over half of its market capitalization gone this week, while Deutsche Bank AG of Germany saw its Friday decline reach 15%, the highest level since the pandemic shock of March 2020.