Bank stocks took a hit there, led by Germany’s Deutsche Bank, as policymakers struggled to calm their nerves after failures on both sides of the Atlantic.
The Stoxx 600 index of European banks, which includes the region’s biggest lenders, fell 3.8 percent, outpacing weakness in the broad national index, led by an 8.5 percent drop in Deutsche shares. Shares in Commerzbank fell 5.5 percent as jitters through the wider sector continued after the collapse of two regional US institutions and a rescue deal for Credit Suisse in recent weeks.
Bigger US banks were also under pressure, with JPMorgan down 1.5 percent and Morgan Stanley closing 2.2 percent lower. Goldman Sachs and Citi lost 0.7 percent and 0.8 percent, respectively.
Troubled regional lender First Republic Bank swung between losses and gains before ending the day down 1.4 percent. However, a better session for peers including Sion took the regional banking index KBW 2.9 percent higher on the day.
“Obviously the main question is: What will be the next shoe?” said Kevin Thozet, a member of the investment committee in Carmignac. “What we are seeing is that market participants are trying to test where the next weak link is in the banking sector.”
Downbeat sentiment in the banking sector and fears of contagion kept gains in the broader market at bay. The US benchmark S&P 500 ended the day 0.6 percent higher after muted moves earlier in the session, while the Nasdaq Composite added 0.3 percent. Meanwhile, Europe’s benchmark Stoxx 600 as a whole closed 1.4 percent lower.
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Bank stocks have been in turmoil since March as traders worry about the blow to lenders from aggressive interest rate hikes by central banks over the past year.
“Europe is very tilted towards the banks, which are already in the eye of the storm,” said Emmanuel Cau, head of European equity strategy at Barclays. “There are bank-specific issues to worry about like regulation and deposit security.”
Deutsche’s move comes after a rise this week in the cost of insuring the lender’s debt against default.
The price of the bank’s five-year credit default swap – a derivative that acts like insurance and pays out if a company defaults – rose from below 150 basis points on Wednesday to 200bp on Friday, according to data from Refinitiv.
Global authorities have tried to ease investor concerns after the failure of several US regional banks, and last week’s takeover of Credit Suisse by rival UBS.
“Deutsche Bank has fundamentally modernized and reorganized its business and the bank is very profitable,” German Chancellor Olaf Scholz said on Friday, after being asked whether the lender is “the new Credit Suisse”. “There’s no reason to worry about it.”
European Central Bank President Christine Lagarde told a eurozone summit in Brussels that the banking sector is “strong” and the ECB is fully equipped to provide liquidity to the eurozone financial system if needed, according to EU officials.
He stressed that “there is no trade-off” between controlling inflation and promoting financial stability.
US Treasury Secretary Janet Yellen on Thursday said regulators are “prepared to take additional action if necessary” to ensure the safety of bank deposits. But efforts to prevent the sale had only a fleeting effect.
The central banks of the euro zone, the US and the UK have all moved forward with interest rate increases to combat stubbornly high inflation this month, despite the turmoil in the banking sector, which is partly the result of the rapid cost of borrowing last year. Fed officials on Friday doubled down on their decision to offer a quarterly rate hike despite stress in the banking sector.
“There is still a nagging question among market participants about whether the turmoil in the banking sector is over or if there will be more contagion,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe.
“It is now clear from central banks that the turmoil will not disrupt the conduct of monetary policy – which sends jitters through the market as it could increase or open up new vulnerabilities in the banking sector.”
Dirk Willer, a strategist at Citigroup, said it was “too early to tell” whether the banking sector’s stress will have an impact on the wider US economy. But he added the Federal Reserve and the ECB had “become more cautious” about tightening monetary policy. He predicted the US would be in recession this year, as “banking stress tightens credit”.
Economists now expect the Fed to pause its rate hike cycle, keeping rates steady at its next meeting in May before cutting in September, while expecting a 0.25 percentage point hike from the ECB meeting and no cut in 2023.
Additional reporting by Guy Chazan in Berlin