[New York Stock Market] Weakness Due to Credit Suisse Shock... Dow Down 0.87%

Major indices on the U.S. New York Stock Exchange showed weakness on the 15th (local time) as concerns over financial risks resurfaced due to the sharp plunge in shares of Swiss Credit Suisse (CS) bank. However, just before the market close, the Swiss authorities announced that they would guarantee CS's liquidity safety, leading only the Nasdaq index to turn positive and close slightly higher. International oil prices fell below $70 per barrel. Gold and the dollar, representative safe-haven assets, surged.

At the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average closed at 31,874.57, down 280.83 points (0.87%) from the previous session. The large-cap-focused S&P 500 index ended at 3,891.93, down 27.36 points (0.7%). The tech-heavy Nasdaq index closed up 5.90 points (0.05%) at 11,434.05.

[Image source=Reuters Yonhap News]

Within the S&P 500, energy, materials, and financial stocks experienced notable declines. As international oil prices slipped below $70 per barrel, energy-related stocks fell more than 5%. Conversely, telecommunications, utilities, technology, and consumer staples stocks rose.

Investors closely monitored the CS-related risks following the collapse of the U.S. Silicon Valley Bank (SVB). CS's largest shareholder, the Saudi National Bank, announced it could no longer provide additional funding, triggering a sell-off amid liquidity concerns. Fears grew that financial risks could spread to major European banks, weighing heavily on the market. CS, listed on the New York Stock Exchange, closed down 13.94% from the previous session.

Shares of major U.S. banks also fell across the board. Citigroup dropped 5.44%, Wells Fargo 3.29%, and Morgan Stanley 5.09%. Regional banks, which had been hit hard by the SVB crisis but rebounded the previous day, also declined. First Republic Bank fell 21.37%, and PacWest Bancorp dropped 12.87%. The SPDR S&P Regional Banking ETF, composed of U.S. small- and mid-sized banks, also fell more than 1.6%.

Just before the New York market close, the Swiss National Bank and the Financial Market Supervisory Authority announced, "There are no signs that turmoil in the U.S. banking market will spread to the Swiss financial sector. Liquidity will be provided to banks if necessary," but concerns remained. Dan I, Chief Investment Officer at Fort Pitt Capital Group, said, "There is too much information to digest."

As financial risks resurfaced, preference for safe-haven assets such as government bonds and gold strengthened. In the New York bond market, government bond yields declined. A drop in bond yields indicates a rise in the price of safe-haven bonds. The 10-year U.S. Treasury yield fell to 3.47%, and the 2-year Treasury yield dropped to around 3.91%. The dollar index, which measures the value of the dollar against six major currencies, rose more than 1% to around 104.6. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's "fear gauge," rose nearly 10% from the previous session to around 26.

Edward Moya, Senior Market Analyst at OANDA, said, "The financial turmoil that started in Silicon Valley is now spreading globally." Peter Boockvar of Bleakley Financial Group appeared on CNBC's Squawk Box and noted, "Pressure in the financial sector is broadly increasing," attributing this to bank failures changing overall sentiment in the banking industry. He explained that investors are now closely watching the soundness of banks.

Larry Fink, Chairman and CEO of BlackRock, warned in his annual letter to investors that financial risks triggered by the SVB crisis could spread further. Fink stated, "More seizures and closures may be coming," and pointed out, "We do not know what the consequences of 'easy money' (liquidity easing due to low interest rates) and deregulation will be across U.S. regional banks." He also referenced the 1980s U.S. savings and loan crisis, which lasted a decade and saw over 1,000 lending institutions collapse. Furthermore, he predicted that this crisis could lead to loan cancellations and stricter capital requirements as financial regulations tighten. Goldman Sachs also lowered its U.S. fourth-quarter growth forecast that day, suggesting that instability in the banking sector could lead to tighter lending.

Concerns over financial risks stemming from CS following SVB are expected to impact the U.S. Federal Reserve's monetary policy decisions ahead of the Federal Open Market Committee (FOMC) meeting scheduled for March 21-22. Currently, the Fed faces two challenges amid rapidly spreading fears of a financial system crisis after SVB's collapse: "inflation stabilization" and "financial system protection."

Economic indicators released that day, including the Producer Price Index (PPI) and retail sales, suggested easing inflationary pressures. According to the U.S. Department of Labor, the February PPI fell 0.1% from the previous month, contrary to the Dow Jones consensus forecast of a 0.3% increase. Year-over-year, the February PPI rose 4.6%, significantly below January's 5.7% increase. Considering that wholesale price increases eventually pass through to consumer prices, these figures signal somewhat eased inflationary pressures. The Consumer Price Index (CPI) for February, released the previous day, rose 6.0% year-over-year, marking the smallest increase since September 2021.

Signals also indicated that Americans are reducing consumption. On the same day, the U.S. Department of Commerce reported that February retail sales declined 0.4% from the previous month, matching Wall Street expectations. This contrasts sharply with January's 3.2% increase. Core retail sales, excluding gasoline and automobiles, rose 0.5% month-over-month but still fell well short of January's 2.3% gain. Retail sales account for two-thirds of the U.S. real economy and are considered a key indicator of overall economic health.

Additionally, the March Empire State Manufacturing Index, which reflects manufacturing activity in New York State, contracted further to -24.6 from -5.8 the previous month, falling short of market expectations of -7.8.

With inflation and consumption indicators meeting or falling below expectations, market expectations for easing monetary tightening continued. Immediately after the release of the PPI and retail sales data that morning, expectations for a rate hold surged sharply.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of that afternoon, the federal funds (FF) futures market priced in about a 47% chance that the Federal Reserve would hold rates steady at the March FOMC meeting. This probability had surged from the 30% range the previous day to over 60% that morning before retreating. The likelihood of the Fed opting for the usual 0.25 percentage point rate hike stood at around 52%.

Conversely, the possibility of a "big step" rate hike (0.5 percentage points), which had been favored just a week earlier, dropped to 0%. The big step option disappeared from the table after the SVB collapse on March 10 highlighted financial system risks.

International oil prices fell more than 5% due to the spread of financial risks, rising inventories, and a strong dollar. On the New York Mercantile Exchange, April delivery West Texas Intermediate (WTI) crude oil closed at $67.61 per barrel, down $3.72 (5.22%) from the previous session. This was the lowest closing price since December 3, 2021, and the first time since 2021 that prices fell below $70 per barrel.