Global stocks were pressured on Friday and safe-haven buying supported government bonds as concerns about the stability of the banking system lingered.
The MSCI World share index traded 0.6% lower. Europe’s STOXX 600 index was down 1.6%. A STOXX sub-index of bank shares, which has swung wildly this week as traders debated if a forced weekend tie-up between Credit Suisse and UBS was a mark of stability or incoming systemic stress, dropped by 6.5% on Friday, heading for its third consecutive week of declines.
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Shares in Deutsche Bank plunged 13% as its credit default swaps, which reflect the cost of insuring debt against the risk of non-payment, climbed to a four-year high.
The German lender also announced plans to redeem $1.5 billion of tier 2 debt due not due to be repaid until 2028.
The moves highlight just how frail sentiment remains after turmoil in the US and European banking sectors in the past two weeks have revived memories of the 2008 global financial crisis.
On Wall Street, futures tracking the blue-chip S&P 500 share index fell 0.7% and those on the technology-focused Nasdaq 100 edged 0.4 lower.
US Treasury sector Janet Yellen has this week tried to assuage investor fears about the health of US lenders and the economic ramifications of a potential lending crunch if depositors flee smaller banks, which have outsized roles in supporting key sectors such as commercial real estate.
“I don’t expect this volatility (in bank stocks) to subside anytime soon,” said Peter Doherty, head of investment research at private bank Arbuthnot Latham in London.
Doherty said issues of “contagian risk within the US banking sector” were undoubtedly weighing on appetite for bank stocks elsewhere.
US regional banks Silicon Valley Bank and Signature Bank failed this month and shares in beleaguered First Republic Bank have lost most of their value.
On Thursday, Yellen pledged further action to safeguard bank deposits, after saying a day earlier that blanket insurance was unlikely. Banks borrowed $110.2 billion at the Federal Reserve’s discount window in the latest week, with the hefty drawdown of emergency credit suggesting some lenders were now unable to secure funds elsewhere.
The Fed raised its main interest rate by a quarter point to a range of 4.5%-4.75% on Wednesday, but signalled it would consider a pause in light of banking system stresses.
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Markets, however, are betting on a US recession and incoming rate cuts.
“You could have a period where you see a precipitous drop in the (availability of) credit in the US ,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management. “This takes us closer to a hard landing, to a US Recession.”
In government bond markets, the yield on the two-year US Treasury, which tracks interest rate expectations, fell 19 basis points (bps) on Friday to 3.62%.
Ten-year yields fell 10bps to 3.4%, after edging 9 basis points lower in the previous session. Bond yields fall as prices of the debt instruments rise.
Traders have also priced in US rate cuts of about 90 bps basis points to about 3.9% by the end of the year.
Euro zone government bond yields followed Treasury yields lower, with the 2-year German yields dropping by a hefty 25 bps to 2.25%.
In currencies, the dollar reversed a losing streak to gain 0.6% against major peers as risk aversion strengthened appetite for the reserve currency.
The yen, a haven currency, climbed 0.7% to a six-week high of 129.8 per dollar, extending its weekly rise to a solid 1.5%. The euro fell 0.9% to $1.073. Brent crude, the global oil benchmark, fell 3.2% to $73.42 per barrel.