June 1, 2023

NEW YORK (AP) – Wall Street stocks tumble again on Wednesday, as concerns about the soundness of banks on both sides of the Atlantic intensify.

The S&P 500 fell 1.5% in morning trading, while markets in Europe fell more sharply as Swiss Credit Suisse shares fell to record lows. The Dow Jones Industrial Average was down 482 points, or 1.5%, to 31,672 as of 10:15 am ET, while the Nasdaq composite was down 1.2%.

Credit Suisse has been struggling with problems for years, including losses it suffered in the collapse of investment firm Archegos Capital in 2021. His shares in Switzerland fell more than 22% after reports that his main shareholder would not put more money into his investments.

Recently, Wall Street’s sharp attention to the banking industry has been heightened by concerns about what could collapse next after the second and third-biggest bank failures in US history last week. US bank shares fell again on Wednesday after a brief one-day lull on Tuesday.

The biggest losses were associated with small and medium-sized banks, which are considered to be more at risk of customers trying to withdraw their money en masse. First Republic Bank fell 7.7% after rising 27% the next day. Shares of Huntington Bancshares fell 5.7%.

Large banks were not affected as much, but still fell. JPMorgan Chase lost 3.6%.

Much of the damage is seen as the result of the most rapid increase in interest rates by the Federal Reserve in decades. The Fed cut its key overnight rate to a range of 4.50% to 4.75% from near zero early last year in hopes of curbing painfully high inflation.

Higher rates can tame inflation by slowing the economy, but they increase the risk of a recession going forward. They also hurt the prices of stocks, bonds and other investments. That last factor was one of the problems that hurt the Silicon Valley bank, which collapsed on Friday because high rates pushed down the value of its bond investments.

The US government announced a depositor protection plan late Sunday at Silicon Valley Bank and Signature Bank, which regulators closed over the weekend in hopes of bolstering confidence in the banking industry. But since then, markets have swung from fear to calm and back again.

Some of the wildest action this week has been in the bond market, where traders rush to guess what all this chaos will mean for the Fed’s future actions. On the one hand, the stress in the financial system could prompt the Fed to delay the rate hike again at next week’s meeting, or at least refrain from the larger rate hike it has potentially signaled.

On the other hand, inflation is still high. While easing interest rates could provide more breathing room for banks and the economy, there are fears that such a move by the Fed could also give inflation more oxygen.

Weaker-than-expected economic reports released on Wednesday may have allayed some of those concerns. One of them showed that inflation at the wholesale level slowed down last month much more than economists expected. It is still strong at 4.6% year-over-year, but better than the forecast of 5.4%.

Other data showed US retailer spending fell more-than-expected last month, although previous months’ spending was revised upwards. In the meantime, manufacturing in New York State is weakened much more than expected. Such data could raise concerns about a coming recession, but it could also reduce inflationary pressures in the short term.

This led to a sharp drop in the yield of two-year Treasury bonds. It is generally in line with the Fed’s expectations and fell to 3.79% from 4.25% late Tuesday. This is a major step for the bond market. The two-year yield was above 5% just a week ago, the highest level since 2007.

The 10-year Treasury yield fell to 3.41% from 3.69%. It helps set rates on mortgages and other important loans.

Weak economic data prompted traders to bet that the Fed could eventually keep rates stable next week. This is a sharp reversal from earlier this month, when the only options seemed to be another 0.25 percentage point increase or a 0.50 point acceleration.

In Europe, the indices fell due to the weakness of the banks. The French CAC 40 fell 3.5% and the German DAX shed 3%. London’s FTSE 100 fell 3.1%.

They followed the progress in much of Asia.

On Wall Street, oil and gas stocks also tumbled as the price of oil fell more than 3%. They led to an almost complete drop in the S&P 500 index, where 90% of the shares fell.

Halliburton fell 8.2% and Schlumberger 5.7%.

AP business writers Joe McDonald and Matt Ott contributed.

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