European bank stocks took a heavy hit on Friday, with Deutsche Bank falling as much as 14 per cent, as efforts by policymakers to reassure investors over the health of the industry failed to calm nerves in the wake of a string of failures on both sides of the Atlantic.
The Euro Stoxx 600 banks index, which contains the region’s biggest lenders, fell 4 per cent by lunchtime, outstripping weakness in broad national indices.
Germany’s Commerzbank fell 8.5 per cent, while France’s Société Générale lost 7.4 per cent and Finland’s Nordea shed 8.1 per cent. Bank of Ireland and AIB had fallen 5.6 per cent and 5.7 per cent respectively on the Irish stock exchange by lunchtime.
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After the outbreak of stress in US regional banks, and last weekend’s hasty takeover of Credit Suisse by its arch rival UBS, global authorities have repeatedly tried to assuage investors’ concerns over the financial hit that banks may take from central banks’ aggressive interest rate rises of the past year.
Last week, European Central Bank president Christine Lagarde said there was “no trade-off” between seeking to control inflation and seeking to foster financial stability.
Late on Thursday, US treasury secretary Janet Yellen said regulators were “prepared to take additional actions if warranted” to ensure the safety of bank deposits. But bank stocks are now falling into an increasingly stubborn pattern of brief periods of stability followed by intense periods of stress.
“There’s still a nagging question among market participants over whether the turmoil in the banking sector is over or if there will be wider contagion,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe.
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“It is also now evident from central banks that the turmoil is not going to put a hard brake on their monetary policy actions – that’s sending jitters through markets because it might exacerbate or exposé new vulnerabilities in the banking sector.”
Friday’s moves in Deutsche Bank’s shares came after the cost of buying insurance to protect against it defaulting on its debt pushed higher this week.
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The price of the bank’s five-year credit default swaps – derivatives that act like insurance and pay out if a company defaults on its payments – climbed to 198 basis points on Friday from 134 basis points on Wednesday, according to data from Refinitiv.
Citigroup strategist Dirk Willer said it was “too early to tell” whether banking sector stress had grown large enough to meaningfully impact the US business cycle. But he added that in light of heightened uncertainty, the Fed had “become more cautious, as did the ECB”.
“We remain negative on risky assets given the banking stress tightens credit and reaffirms Citi’s call for a US recession in [the second half] of 2023,” Mr Willer said.
On Wednesday, the US Federal Reserve proceeded with a 0.25 percentage point interest rate increase and on Thursday, the Bank of England also raised its benchmark rate by 0.25 percentage points.
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Also on Thursday, the Swiss National Bank raised interest rates by 0.5 percentage points – despite being a major theatre for the banking panic due to the collapse of Credit Suisse and its forced acquisition by rival UBS. Last week the European Central Bank raised rates by 0.5 percentage points.
Emmanuel Cau, head of European equity strategy at Barclays, said: “It’s about sector composition, Europe is very tilted towards banks – which have been in the eye of the storm . . . and there are bank specific issues to worry about like regulation and deposit safety.”
Investors are now anticipating that the Fed will pause its rate raising cycle, keeping rates on hold at its next meeting in May before cutting in September, while anticipating a 0.25 percentage point rise from the ECB meeting and no cuts in 2023.
Futures tracking the blue-chip S&P 500 fell 0.7 per cent, while contracts following the tech-heavy Nasdaq 0.4 per cent.
In government debt markets, yields on 10-year US Treasuries fell 0.1 percentage points to 3.298 per cent, while two-year contracts lost 0.2 percentage points to 3.593 per cent.
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Yields on 10-year German Bunds fell 0.2 percentage points to 2.014 per cent, while two-year contracts fell 0.2 percentage points to 2.251 per cent.
Hong Kong’s Hang Seng index rose 0.7 per cent. Other benchmarks in the region nursed minor losses, including a drop of 0.3 per cent for China’s CSI 300.
In currency markets, the dollar index – which tracks the greenback’s value against a basket of other currencies – was up 0.7 per cent.
Brent crude fell 3.2 per cent to $73.43 (€68.38) per barrel, while WTI, the US equivalent lost 3.6 per cent to $67.39 per barrel. - Copyright The Financial Times Limited