US banking turmoil spooks global markets

The wave of selling extended in global markets today, after growing concerns about the safety of the US banking system prompted investors to reduce their exposure to high-risk assets and turn to safe havens. S&P 500 futures fell 1.2%, heading for a second straight losing session, after two regional banks in the United States announced they were exposed to fraudulent activity related to loans directed to distressed real estate funds. Also Read: Home Loan Fraud Scandal Rocks US Banks, Reveals Credit Gaps. Global impact… Banks lead the losses. The wave of declines was repeated in European and Asian markets today, as the European banks index fell 2.9%, topping the list of worst-performing sectors within the general index. German Deutsche Bank shares recorded a sharp decline of more than 6%. Concerns extended to the credit market as the Credit Default Swaps (CDS) index (which is a type of insurance against the risk of default) on the senior debt of European banks jumped 3.2 basis points, the biggest rise in about a month. The index, which measures the risks of banks’ subordinated debt, also rose to its highest weekly rate. Havens shine On the other hand, sovereign bonds and safe-haven currencies such as the Japanese yen and the Swiss franc rose, with purchases accelerating in search of safety amid market volatility, at a time when equity valuations are still near their highest historic levels. Read more: The yen strengthens against the dollar amid demand for safe havens. Analysts said that the recent developments remind the sensitivity of the financial system to sudden shocks, especially those related to real estate loans and credit risks. US Treasuries continued their gains for the second day in a row as the 10-year bond yield fell two basis points to 3.96%. On the other hand, gold saw minor fluctuations, while the Japanese yen and Swiss franc topped the list of currencies that posted gains against the dollar. Signs of growing anxiety These moves highlight growing concerns about the US credit market, and are the clearest sign yet of the underlying tensions running through the corridors of Wall Street. These fears are added to a growing list of investor concerns, including a government shutdown in the United States, fears of an artificial intelligence bubble and renewed trade tensions between Washington and Beijing. “This scene appears to be a symptom of the end of an economic cycle as we see signs of easing in lending standards,” said Raphael Toin, head of capital markets strategies at Tikehau Capital. “With this year’s strong bull run and rising valuations, the temptation to take profits and lock in year-to-date gains is increasing.” As the repercussions of the collapse of First Brands, which specializes in auto components, spread within the lending sector, the SPDR exchange-traded fund, which tracks the S&P index, which includes stocks of mid-cap and small-cap US regional banks, took a hit, as bets against it rose to about 30% in October compared with the outstanding share. 8, according to data collected by S&P Global Market Intelligence. Among the most prominent euro-denominated bank bonds that also fell on Friday, JPMorgan’s euro-denominated bonds due in January 2036 fell about 0.5%, the biggest drop since early September, and Barclays Bank’s bonds due in 2035 also fell at the fastest pace in about three weeks. “Exaggerated declines” But some analysts eased fears that Friday’s declines were exaggerated and did not represent an indication of systemic risk, describing comparisons between them and the start of the financial crisis as “unrealistic”. Also read: The global financial crisis…lessons learned from the bankruptcy of Lehman Brothers. Jerome Legra, head of research at Axiom Alternatives Investments, said: “The fall in European bank shares today is nothing more than a quick emotional reaction, as there are currently many reasons to sell instead, including falling interest rates.” Political risks led to the significant gains these banks made during the year.” He concluded: “I was there in 2007, and I can say that what is happening now is not at all similar to the period before the global financial crisis.”