Shares in several US regional banks tumbled in pre-market trading on Thursday as the industry’s worst crisis since 2008 rumbled on, overshadowing a suggestion from the Federal Reserve that it could soon pause its policy of interest rate increases.
California’s PacWest was more than 45 per cent lower ahead of the Wall Street open after the lender said it had been approached by potential partners and investors over a potential sale. Fellow regional lenders Western Alliance and Metropolitan Bank fell by 17 per cent and 15 per cent respectively.
Silicon Valley Bank, Signature and First Republic have all collapsed since March, with the KBW Regional Banking index down 31 per cent in the past three months.
First Horizon’s share price meanwhile halved in pre-market trading after the Memphis-based lender and Canada’s TD Bank said regulatory hurdles meant they had mutually agreed to terminate a planned merger.
US futures slipped after the Federal Reserve raised the federal funds rate to a new target range of 5-5.25 per cent, the highest level since mid-2007. Contracts tracking the S&P 500 fell 0.4 per cent and those following the tech-heavy Nasdaq were steady.
The Fed’s latest statement removed previous guidance stating additional monetary tightening “may be appropriate” and emphasised its policy approach would depend substantially on economic data.
Speaking after the policy decision, chair Jay Powell said the central bank still expected inflation would take time to reach its target range. “We on the committee have a view that inflation is going to come down not so quickly . . . if that forecast is broadly right, 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 while markets have priced in several rate cuts before the end of the year, opinions were mixed on the likelihood of imminent easing while inflation lingered.
“A slowdown, or even a mild recession, may not be sufficient to convince the Fed to reverse policy course soon,” said Tai Hui, a market strategist at JPMorgan Asset Management.
Ray Sharma-Ong, investment director for multi-asset investment solutions at Abrdn, said banking sector issues — such as the recent failure of First Republic Bank — were unlikely to pose a systemic threat, but tightening credit conditions could weigh heavily on US growth and force the Fed to take supportive action.
“With the Fed’s forward guidance . . . indicating a strong shift towards data dependence, we expect the Fed to cut rates when a recession occurs,” Sharma-Ong said.
Across the Atlantic, Europe’s region-wide Stoxx 600 fell 0.8 per cent as traders prepared for an expected interest rate rise from the European Central Bank.
The ECB is expected to raise interest rates by a quarter-point to 3.25 per cent, in a move that would mark a slowdown from consecutive half-point rises this year. The headline rate of eurozone inflation rose for the first time in six months to 7 per cent in the year to April, though core inflation dipped for the first time since June 2022.
China’s CSI 300 stock index was flat on return from an extended holiday on Thursday, as were South Korea’s Kospi and Australia’s S&P/ASX 200. Hong Kong’s Hang Seng index was the only major benchmark to notch any gains, up 1.2 per cent, while markets in Japan were closed for a holiday.