European stocks and US futures dragged down by banks

European stocks and US futures were dragged down by chaos in the banking sector on Wednesday as investors continued to fret over the value of industry bond portfolios after the collapse of Silicon Valley Bank, and the direction of central banks’ next interest rate moves.

Europe’s benchmark Stoxx 600 was down 2.3 per cent, with the UK’s FTSE 100 down 2.4 per cent and France’s CAC 40 off 3.2 per cent as investor jitters extended for a third day.

Futures contracts tracking the blue-chip S&P 500 and the tech-heavy Nasdaq Composite both pointed to a 1.7 per cent decline at the open.

The Euro Stoxx Bank index dropped 8.1 per cent, after Credit Suisse’s largest shareholder said it would not provide the Swiss lender with any more capital.

Credit Suisse shares lost a quarter of their value, dragging peers lower. Société Générale lost 13.1 per cent, Bank of Ireland shed 8.4 per cent and BNP Paribas fell 11.8 per cent.

The sell-off in bank shares piled renewed pressure on to a sector already reeling from the fallout of the SVB collapse, and dragged down broader equity markets in Europe.

“Credit Suisse is an isolated case. But banks in Europe, because of regulatory pressure, had to load up on negative-yielding long-duration bonds at the worst time and now they are facing major unrealised losses on the balance sheet and the market is questioning whether Europe could see the same issue as the US,” said Charles-Henry Monchau, chief investment officer at Syz Bank.

Investors also grew cautious that the uncertainty in the European and US banking sectors would force central banks to change potential plans to raise interest rates aggressively to combat inflation.

The yield on the two-year US Treasury note, which closely tracks interest rate expectations and moves inversely to price, gave up its early gains to fall 0.3 percentage points to 3.9 per cent. The yield on the 10-year note, which underpins global borrowing costs, also reversed direction to fall 0.1 percentage points to 3.5 per cent.

Yields on 10-year German Bunds slid 0.2 percentage points, to 2.22 per cent. The yield on the two-year note fell 0.4 percentage points to 2.53 per cent.

The Fed is contending with both stubbornly high inflation and the demise of three US banks, and the latter has increased speculation that it will have to pause the ascent of its interest rate increases earlier than expected.

Investors have ramped up bets that the US Federal Reserve would cut interest rates later this year. Markets are now pricing in, at most, a single 0.25 percentage point increase, followed by as much as 1 percentage point rate cuts by the end of the year.

The European Central Bank meets on Thursday to decide its next interest rate move. Investors are divided over whether there will be a 25 or 50 basis point rise.

“I think central banks not tightening further would be seen as a sign of panic. Given that inflation is still very high they need to stay the course,” said Emmanuel Cau, head of European equity strategy at Barclays.

Earlier in the day, equities in Asia had rebounded as traders bought financial stocks following heavy selling at the start of the week.

Japan’s Topix added 0.7 per cent, South Korea’s Kospi added 1.2 per cent and Australia’s S&P/ASX 200 gained 0.9 per cent. Hong Kong’s Hang Seng index rose 1.5 per cent. The Topix Banks index in Japan gained 3.3 per cent after suffering its steepest decline in three years on Tuesday.

In currency markets, the dollar index, which measures the greenback against six peer currencies, rose 1.1 per cent. Sterling slipped 0.5 per cent flat against the dollar, ahead of UK chancellor Jeremy Hunt’s spring Budget.

Oil prices gave up early gains, with both Brent crude and West Texas Intermediate, the US benchmark, trading 1.3 per cent lower.