Just a day after Wall Street breathed a sigh of relief with the acquisition of First Republic Bank, a selloff in U.S. regional lenders fueled renewed anxiety over financial stability, sinking stocks across the board and spurring a flight to the safest corners of the market.
For many traders, the timing couldn't be worse.
On the eve of the Federal Reserve decision, multiple volatility halts in PacWest Bancorp and Western Alliance Bancorp were seen as disturbing. Both shares were down at least 20%.
The financial industry weighed heavily on the S&P 500, which sank almost 2% at one point before trimming losses.
"Wall Street is quickly hitting the sell button as banking turmoil appears it is not going away anytime soon," said Ed Moya, senior market analyst at Oanda. "Risk appetite did not stand a chance as traders focused on lingering doubts over the regional banks, rising recession odds, and growing risks that the U.S. could default on its debt next month."
The rout in banks only deepened a sense of uneasiness among investors about the Fed's next steps. In addition to the financial strains, officials are caught between stubbornly high inflation and data pointing to an economic slowdown — such as Tuesday's JOLTS record of job openings that fell to lowest in nearly two years.
Dovish Bias
Those factors combined with the brewing angst over the U.S. debt ceiling discussions reinforced bets on a more dovish central bank.
While swaps are still pricing in a quarter-point Fed hike Wednesday, traders have trimmed their bets on a further rate increase — while amping up wagers on cuts before the year is over.
