But is investor fear warranted or an overreaction to Wall Street concerns?
by Andre Janse van Vuuren and Julien Ponthus
Stocks extended declines as doubts over the credit health of regional US banks drove traders to cut down on risk, capping a volatile week that exposed the vulnerability of markets near record levels. Bonds and haven currencies were major beneficiaries as investors rushed for safety.
The S&P 500 headed for a second day of losses, with futures down 1.3% after two regional banks said they were victims of suspected fraud on loans tied to distressed property funds. European and Asian markets mirrored the US selloff. An index for European banking stocks dropped 2.9%, with losses seen across all sectors. Deutsche Bank AG fell more than 6%.
Risk gauges across Europe’s credit market rose, with indexes that track credit default swaps on senior bank bonds up as much as 3.2 basis points, the most in almost a month. A similar index that tracks CDS contracts for subordinated bank debt climbed the most in a week.
US Treasuries added to gains, with 10-year yields falling another two basis points to 3.96%. Gold fluctuated, while the yen and Swiss franc led gains among major currencies against the dollar.
The moves underscored growing concerns about the US credit market, offering the clearest sign yet of the nervous undercurrents running through Wall Street. They add to a mounting list of investor worries, from the US government shutdown to fears of an AI bubble and renewed US–China trade tensions.
“This very much looks like end-of-cycle symptoms, where we can see hints of complacency in lending standards,” said Raphael Thuin, head of capital markets strategies at Tikehau Capital. “With this year’s rally and costly valuations, the temptation to take profits and secure year-to-date gains is high. Market moves are also likely to be amplified today as we’re closing into the weekend.”
As fears about the fallout from the collapse of auto-parts supplier First Brands begin to ripple across the lending industry, short interest in the SPDR S&P Regional Banking ETF has risen to 30% of shares outstanding, from 18.4% on Oct. 8, according to data compiled by S&P Global Market Intelligence.
Among the biggest decliners in European bank bonds on Friday were JPMorgan’s euro-denominated securities due January 2036, which fell about 0.5%, the most since early September, and Barclays Plc’s bonds due 2035, which dropped the most in about three weeks.
Some analysts downplayed Friday’s moves as an overreaction rather than a sign of systemic risk, calling comparisons to the start of the financial crisis overblown.
“Today’s move on European banks is purely a knee-jerk reaction, as there are currently a lot of reasons to sell them: falling interest rates, political risk and the fact they rallied so much this year,” said Jerome Legras, head of research at Axiom Alternatives Investments. “I was there in 2007 and I can tell you that this is absolutely nothing like it.”
Corporate News:
- BBVA SA gained as much as 11% after its bid to buy rival Banco Sabadell SA failed.
- Novo Nordisk A/S and Eli Lilly & Co. shares fell after President Donald Trump said the price of the blockbuster diabetes drug Ozempic could come down to just $150 a month.
Some of the main moves in markets:
Stocks
- The Stoxx Europe 600 fell 1.8% as of 9:26 a.m. London time
- S&P 500 futures fell 1.3%
- Nasdaq 100 futures fell 1.4%
- Futures on the Dow Jones Industrial Average fell 1%
- The MSCI Asia Pacific Index fell 1.1%
- The MSCI Emerging Markets Index fell 1.4%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.2% to $1.1705
- The Japanese yen rose 0.5% to 149.75 per dollar
- The offshore yuan was little changed at 7.1287 per dollar
- The British pound was little changed at $1.3422
Cryptocurrencies
- Bitcoin fell 2.4% to $105,257.61
- Ether fell 3.1% to $3,735.28
Bonds
- The yield on 10-year Treasuries declined two basis points to 3.96%
- Germany’s 10-year yield declined two basis points to 2.55%
- Britain’s 10-year yield declined one basis point to 4.49%
Commodities
- Brent crude fell 0.6% to $60.69 a barrel
- Spot gold rose 0.4% to $4,346.04 an ounce
This story was produced with the assistance of Bloomberg Automation.
Copyright Bloomberg News
