The Australian sharemarket has tumbled at the open of trading on Tuesday, reflecting Wall Street’s slide overnight as investors continue to be rattled by the collapse of Silicon Valley Bank.
The S&P/ASX200 nosedived by 1.5 per cent or 105.7 points to 7003.1 points at 10.15am AEDT, with tech and bank stocks driving the losses. The big four banks are all down by more than 1 per cent.
Virgin Money and Computershare have started the morning as the poorest performers so far, down 9 per cent and 4.17 per cent respectively.
Meanwhile, Silver Lake Resources and gold explorer St Barbara have ticked up 4.7 per cent and 4.3 per cent apiece.
Overnight on Wall Street, bank stocks tumbled amid worries about what may be next to break following the second- and third-largest bank failures in US history. But much of the rest of the market is rising on hopes the fear will force the Federal Reserve to take it easier on its economy-rattling hikes to interest rates.
President Joe Biden moved on Monday afternoon to reassure the American people that the US banking system was safe, helping to boost stocks. The S&P 500 dipped 0.2 per cent after whipsaw trading, where it careened between an early loss of 1.4 per cent and a midday gain of nearly that much. The Dow Jones 0.3 per cent, while the Nasdaq composite rose 0.4 per cent.
Cryptocurrency prices surged higher, with Bitcoin up 15.7 per cent to $US24,407 just after 7am AEDT, according to Bitstamp. The Australian dollar is sharply higher, jumping 1.3 per cent to 66.68 US cents just before 7am AEDT.
The sharpest Wall Street drops again came from banks and other financial companies. Investors are worried that a relentless rise in interest rates meant to get inflation under control are approaching a tipping point and may be cracking the banking system.
Shockwaves were also felt across Europe, where the STOXX banking index closed 5.7 per cent lower. Germany’s Commerzbank fell 12.7 per cent, while Credit Suisse closed at a new record low after falling 9.6 per cent.
In London, the government arranged the sale of Silicon Valley Bank UK Ltd., the California bank’s British arm, for the nominal sum of one British pound, or roughly $US1.20.
Swiss financial regulator FINMA said it was closely monitoring the banks and insurers it oversees and looking for signs of contagion, while a senior European Central Bank supervisor said the board which oversees the euro zone’s biggest banks did not see any need for an emergency meeting.
The US government announced a plan meant to shore up the banking industry following the collapses of Silicon Valley Bank and Signature Bank since Friday.
The most pressure is on the regional banks a couple steps below in size of the massive, “too-big-to-fail” banks that helped take down the economy in 2007 and 2008. Shares of First Republic Bank fell 61.8 per cent, even after the bank said Sunday it had strengthened its finances with cash from the Federal Reserve and JPMorgan Chase.
Huge banks, which have been repeatedly stress-tested by regulators following the 2008 financial crisis, weren’t down as much. JPMorgan Chase fell 1.8 per cent, and Bank of America dropped 5.8 per cent.
“So far, it seems that the potential problem banks are few, and importantly do not extend to the so-called systemically important banks,” analysts at ING said.
The broader market flipped from losses to gains as expectations built that all the furor will mean the Fed won’t re-accelerate its rate hikes, as it had been threatening to do. Such a move could give the economy and banking system more breathing space, but it could also give inflation more oxygen.
Some investors are calling for the Fed to make cuts to interest rates soon to stanch the bleeding. Rate cuts often act like steroids for the stock market.
The wider expectation, though, is that the Fed will likely pause or at least hold off on accelerating its rate hikes at its next meeting later this month.
That would still be a sharp turnaround from expectations just a week ago, when many traders were forecasting the Fed would hike its key overnight interest rate by 0.50 percentage points. That would put a tighter squeeze on markets and the economy after the Fed had just downshifted last month to an increase of 0.25 points from earlier hikes of 0.50 and 0.75 points.
The fear was that stubbornly high inflation would force the Fed to get even tougher, and investors were bracing for the Fed to keep hiking at least a couple more times after that.
Now, “depending on reactions in financial markets and eventual fallout on the overall economy, we wouldn’t rule out that the hiking cycle could even be over and that the next move by Fed officials may be lower not higher,” said Kevin Cummins, chief US economist at NatWest.
“Restoring liquidity in the banking system is easier than restoring confidence, and today it is clearly about the latter,” said Quincy Krosby, chief global strategist for LPL Financial.
At one point during the morning, a measure of fear among stock investors on Wall Street touched its highest level since October before falling back. That helped the price of gold to climb, as investors looked for things that seemed safe. It rose $US49.30 to settle at $US1,961.50 per ounce.
Prices for Treasurys also shot higher on both demand for something safe and expectations for an easier Fed. That in turn sent their yields lower, and the yield on the 10-year Treasury plunged to 3.54 per cent from 3.70 per cent late Friday. That’s a major move for the bond market.
The two-year yield, which moves more on expectations for the Fed, had an even more breathtaking drop. It fell to 3.99 per cent from 4.59 per cent Friday. It was above 5 per cent earlier this month.
