Falling U.S. regional bank stocks weigh on Wall Street

U.S. regional banks continued to fall on Thursday as the industry’s worst crisis since 2008 unfolded, with California-based lender PacWest exploring a possible selloff.

PacWest shares fell more than 50% after the lender said it had been approached by potential partners and investors about a potential sale. The KBW Regional Banking Index lost 3.5% during the session.

Silicon Valley Bank, Signature and First Republic have all collapsed since March, raising concerns among investors about the health of some other regional banks. The KBW regional index has lost 35% over the past three months.

“We’re seeing the big banks win, we’re going to see massive consolidation, and we’re going to see very sharp regulation of small and mid-cap banks,” said Brian Belski, chief investment strategist at BMO Capital Markets. “My theme remains resolved: scale. The regional banks were unable to compete with the big banks.

First Horizon’s share price, meanwhile, fell 33% after the Memphis-based bank and TD Bank of Canada said regulatory hurdles meant they had mutually agreed to end a planned merger.

Line chart of the KBW Regional Banking Index showing US regional banks falling amid fresh health fears

The S&P 500 index of US stocks fell 0.7% and the tech-heavy Nasdaq Composite lost 0.5%.

Treasuries continued their rally from Wednesday, with the yield on the rate-sensitive two-year note falling 0.07 percentage points to 3.77%.

On Wednesday, the Federal Reserve raised the federal funds rate to a new target range of 5% to 5.25%, the highest level since mid-2007. The central bank’s latest statement removed previous indications that further monetary tightening “may be appropriate” and stressed that its policy approach would largely depend on economic data.

Speaking after the policy decision, Fed Chairman Jay Powell said the central bank still expected inflation to take time to reach its target range. “We on the committee believe that inflation is not going to come down so quickly. . . if this forecast is broadly correct, it would not be appropriate to cut rates,” he said.

Analysts said the changes to the Fed’s statement could mark the end of the current tightening cycle. But as markets priced in several rate cuts before the end of the year, opinions were mixed on the likelihood of an imminent easing as inflation remained high.

“A slowdown, or even a mild recession, may not be enough to convince the Fed to reverse policy soon,” said Tai Hui, market strategist at JPMorgan Asset Management.

Ray Sharma-Ong, chief investment officer for multi-asset investment solutions at Abrdn, said problems in the banking sector – such as this week’s failure of the First Republic – should not pose a systemic threat, but tightening credit conditions could weigh heavily on US growth and strength. the Fed to take supportive measures.

“With forward guidance from the Fed. . . indicating a strong shift towards data dependence, we expect the Fed to cut rates in the event of a recession,” Sharma-Ong said.

Across the Atlantic, Europe’s regional Stoxx 600 fell 0.5% after the European Central Bank raised rates by a quarter of a percentage point to 3.25%, in a move that marks a slowdown from consecutive increases of half a point this year. The euro was down 0.4% against the dollar.

The euro zone’s headline inflation rate rose for the first time in six months to 7% in April, although core inflation fell for the first time since June 2022.

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