Fear of a global financial crisis grips stock markets around the world
The banking sector has sunk markets as sell orders and demand for safe-haven assets such as gold is on the rise.
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Investor fears of financial system failure following the collapses of Silicon Valley Bank (SVB) and Signature are affecting stock markets around the world. Despite President Biden's words about the strength of the U.S. banking system, markets have been volatile, with sell orders at levels not seen since 1973. Safe-haven securities, such as gold, are once again the most in demand, pending what happens in the coming days. In trading prior to market opening of Tuesday, the U.S. banking sector staged a strong rebound from the severe drop seen on Monday. First Republic Bank, which fell 61.8% Monday, saw its shares rise 20% in the early hours Tuesday.
According to CBOE Global Market, put options volume for all stocks and exchange-traded funds reached the highest level ever recorded last Friday. CBOE has data going back to 1973, the year in which the listed options market was created. These contracts grant investors the right to sell shares at a specific price on a specific date. They can be used to hedge portfolios, as share insurance, or to prevent losses in major economic downturns.
Wall Street's fear indicator surpassed 30 points
On Monday, the value of the CBOE Volatility Index (VIX), Wall Street's fear gauge, briefly surpassed 30 points, something that hasn't happened since October of last year, as reported by The Wall Street Journal. The index ended the day around 26.5 points. Levels above 30 indicate that traders are scooping up hedges quickly to protect against further stock declines, while levels below 20 indicate stability.
Many investors are now seeking refuge in traditionally safer assets such as government bonds and gold. Most are preparing for increased financial market stresses to spill over into other areas of the economy. The yield on two-year Treasury bonds plummeted at the beginning of the week, suffering the largest one-day drop since 1987, on what is known as Black Monday.
"The market takes the stairs up and the elevator down"
Speaking to WSJ, Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, indicated that this situation may drag on for several weeks before investors regain confidence and start buying again, ruling out a global financial collapse.
Asian markets plunge on Tuesday
Asian markets plummeted on Tuesday. Japan's benchmark Nikkei 225 index fell nearly 2.0%, compounding the previous day's losses. The Australian S&P/ASX 200 was down 1.6%. South Korea's Kospi lost 1.9%, while Hong Kong's Hang Seng dropped 1.2% and Shanghai's SSE Composite was down 0.7%. The banking sector was the main factor in tanking the stock markets of these countries, causing political leaders to defend the strength of their respective financial systems. The Bank of Korea was one of the first Asian central banks to announce that it would intervene to stabilize markets if necessary.
In China, markets are looking askance at SPD Silicon Valley Bank, an entity founded in 2012 by SVB and state-owned Shanghai Pudong Development Bank (each holding 50% of the shares). The bank was created to support the country's technology companies, with a special focus on semiconductors and fintechs. The bank was quick to emphasize over the weekend that its balance sheet operated independently of its Californian parent company.
Europe: Credit Suisse's bankruptcy fears
In Europe, fears of a financial crisis grew on Monday, especially after Credit Suisse admitted "a material weakness" in the control of its financial reporting, which made it "not effective." The price of the Swiss giant's default insurance soared to 446 points following these reports, while its shares plummeted 10% to an all-time low.
It was not the only bank to suffer heavy losses in Europe. The biggest declines were for Germany's Commerzbank (12.71%) and Italy's Unicredit (7.84%), although there were losses across the entire sector, which weighed on the main indexes. Milan fell by 4.03%, Madrid by 3.51%, Frankfurt by 3.04%, Paris by 2.9%, London by 2.58% and the Euro Stoxx 50 index, which groups the largest listed companies, by 3.14%.
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