Credit ratings agency Moody’s has downgraded its outlook for the entire US banking sector to negative from stable, citing the “rapidly deteriorating operating environment” following the failure of two banks in recent days.
Moody’s report on Tuesday morning came even as shares of troubled regional banks rose after a sharp sell-off in the previous session, with some rising more than 50 percent as contagion fears subsided after of the collapse of Silicon Valley Bank.
The report cited “the rapid and substantial decline in bank depositor and investor confidence” in recent days, which it said, “highlights the risks in US banks’ asset and liability management.”
But at the opening bell, First Republic Bank jumped 59 percent, after a record 62 percent drop in the previous session. PacWest was up 56 percent and Western Alliance was up 48 percent.
The Big Four of trillion-dollar banks were also trending higher, leading Wall Street’s major stock indexes, with the Dow Jones Industrial Average rising 436 points, or 1.4 percent, as of 10:40 a.m.
A San Francisco police officer is parked in his car in front of the First Republic Bank headquarters on Tuesday. First Republic shares rose 59%, after a record 62% drop in the previous session
Bank of America rose 5.2 percent, Citigroup 5.5 percent, JPMorgan Chase 3 percent and Wells Fargo 8 percent.
The new Moody’s report projected that the Federal Reserve will continue to raise interest rates at its meeting next week, warning that this ‘could deepen challenges for some banks’.
The ratings agency said the Fed’s $25 billion emergency program to support banks and protect depositors “will reduce contagion risks.”
“However, banks with substantial unrealized securities losses and with non-retail and uninsured US depositors may be even more sensitive to depositor competition or eventual flight, with adverse effects on funding, liquidity, earnings and capital,” the report said.
Moody’s earlier put six smaller regional banks on alert for a possible downgrade on the bonds.
First Republic, Zions, Western Alliance, Comerica, UMB Financial and Intrust Financial are being reviewed for “extremely volatile funding conditions for some US banks exposed to the risk of uninsured deposit outflows.”
However, stocks in the financial industry rose on Tuesday to recoup some of their sharp falls the day before, sending Wall Street higher.
The S&P 500 rose 1.9 percent in morning trade after the latest released Consumer Price Index showed inflation remains high but still falling from last summer’s all-time high.
A week ago, Wall Street expected Tuesday’s inflation report to be the most important data of the week, if not the month.
The concern at the time was that inflation would remain stubbornly high, which could force the Federal Reserve to once again accelerate the pace of its interest rate hikes.
Such increases can reduce inflation by slowing the economy, but they increase the risk of a recession later. They also hurt the prices of stocks, bonds, and all kinds of other investments.
US annual inflation fell again in February to 6%, paving the way for the Federal Reserve to slow or halt its rate hikes as it grapples with a banking crisis
The Federal Reserve has raised its benchmark overnight interest rate by 450 basis points since last March from near zero to the current range of 4.50-4.75 percent.
CME Group’s FedWatch tool showed an 83% probability of a 25 basis point rate hike next week, and a 17% probability that the Fed will not raise its benchmark rate.
Tuesday’s report showed that consumer-level inflation was 6 percent in February, compared with a year earlier. That matched economists’ expectations and was a slowdown from January’s 6.4 percent inflation rate, but still well above the Fed’s target.
In normal times, that could require an increase in the size of rate hikes. The problem for the Fed is that it is also facing a banking system that may already be cracking from all the rate hikes in the past year, which came at the fastest pace in decades.
The second and third largest bank failures in US history have occurred since Friday.
“The Federal Reserve is caught between a rock and a hard place,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
‘Inflation met expectations, but remains uncomfortably hot. Financial stresses are intense. Prudence would dictate that they pause, but along with a stern warning that if inflation trends don’t improve, they may need to go higher.
He said the Fed also has other tools to use besides rate hikes. Among them: the Fed could adjust the rate at which it is winding down its huge hoard of bond investments, a move that effectively tightens the screws on the financial system.
A looser Fed could give the banking system and the economy more room to breathe, but it could also give inflation more oxygen.
Traders were quick on Monday to place some bets that the Fed could decide to hold rates steady at its next meeting, instead of accelerating them to a 0.50 percentage point hike as they thought a week ago.
Credit Suisse may be the next bank to close, a financial expert has said
Credit Suisse shares are at a record low in early trading on Tuesday after the bank admitted finding “material weaknesses” in its annual report. Credit Suisse posted an $8 billion loss in 2022
Following the inflation data, bets are largely falling for it to hold up 0.25 points later this month, according to data from CME Group.
Overnight, European and Asian markets were rocked by news that investment bank Credit Suisse had discovered a “material weakness” in its internal controls over financial reporting.
London’s FTSE 100 fell 0.4% to 7,515 points, hitting its lowest level since January 3. It compounded a 2.58 percent drop on Monday as more than £50 billion of value was wiped from the stock market over the course of the day.
Banking giants HSBC and Standard Chartered were among the biggest losers during early trading on Tuesday.
