Wall Street plummets as bank fears erupt

BEIJING – Stocks tumble on Wall Street on Thursday as concerns mount about a cracking U.S. banking system.

The S&P 500 was down 0.8% in late trading as several market forces swirled, from the European Central Bank’s latest rate hike to a report that more U.S. workers were laid off last week. last week than expected. The Dow Jones Industrial Average was down 343 points, or 1%, at 33,067 as of 3:15 p.m. EST, while the Nasdaq composite was down 0.5%.

The craziest action took place in the financial sector, where shares of PacWest Bancorp fell 43.9%. It has recently come under intense scrutiny from investors following three of the four biggest US bank failures in history.

“The important thing to remember is that banking is as much about trust as it is about economics and accounting,” said George Bory, chief investment strategist for fixed income at Allspring Global Investments. “We are in a period where trust is very fragile, probably damaged. Policymakers are trying to restore confidence in the system, and you can just see what is happening in stock prices: confidence has not yet been restored. »

Wall Street has been searching for other possible weak links in the system, which could lead to a rapid exodus of customer deposits as the industry faces much higher interest rates. PacWest said overnight that it was considering its options and that several potential partners and investors approached it. It also said deposits from its top customers had increased since late March.

Fear is so great in the sector that shares of Western Alliance Bancorp plunged as much as 61% after a Financial Times report said the Phoenix-based bank was considering selling its business, among other options. But the company refuted the report, saying there “is not a single element of the article that is true”. His action reduced his fall to a loss of 35.1%.

The wild moves came after Western Alliance tried to reassure investors late Wednesday with a statement that its deposits were flat and rose Monday through Tuesday.

First Horizon, meanwhile, fell 33.6% after it and TD Bank Group agreed to cancel their merger deal. TD told First Horizon it doesn’t know when it might get regulatory approvals for the deal.

Earlier this week, regulators seized First Republic Bank and sold most of it to JPMorgan Chase, hoping to bolster confidence in the sector. Officials stressed they saw the banking system was sound and safe, but concerns were not leaving the market.

Banks face radically different trading conditions now that interest rates are no longer at historic lows. The Federal Reserve announced its latest increase on Wednesday, which took its overnight rate to a range of 5% to 5.25%, from virtually zero at the start of last year.

The Fed raised rates at the fastest pace in decades to bring down high inflation. But it does so by slowing the economy, increasing the risk of a recession and hurting investment prices. Many of the loans made and bonds bought by banks when rates are low are suddenly worth much less in today’s market.

The concern now is that even if no more banks fail, the turmoil in the sector could cause small and medium banks to cut lending. That in itself could act as rate hikes, further stifling the economy. Many investors already believe that a recession will hit later this year.

A report on Thursday showed that the number of American workers filing for unemployment last week accelerated slightly more than expected. The labor market has remained largely resilient, and this is one of the main pillars still supporting the slowing economy. A more comprehensive report on Friday will provide the latest monthly update on the overall labor market.

With growing concerns about the economy, the Fed indicated on Wednesday that it may have to raise interest rates for the time being. But the European Central Bank continued on Thursday. Its president, Christine Lagarde, said she had “more ground to cover, and we are not stopping”. It slowed the pace of its hikes, raising rates by only a quarter of a percentage point.

The higher rates mean bond investors receive higher returns for buying bonds, which in turn provides better protection against future market swings, Allspring’s Bory said. “Fixed income investing today is actually the best in a decade and a half,” he said.

Helping to support stocks despite all the worries was a significantly better than expected earnings season. S&P 500 companies are still on track for a second consecutive quarter of declining earnings, but results have generally been better than expected.

Ball gained 13.7% after the maker of aluminum cans and other packaging reported better-than-expected profits.

In contrast was Qualcomm, which fell 5.9%. It announced stronger-than-expected results for the latest quarter, but analysts pointed to disappointing forecasts for the results ahead.

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AP Business Writers Joe McDonald and Matt Ott contributed.