Global markets fell on Friday amid concerns about the US banking system after some venture capital firms urged investors to move their money away from a major bank for start-ups.
Bank of America and Wells Fargo fell 6.2 percent, while JPMorgan Chase fell 5.4 percent, following a steep selloff in banking stocks on Wall Street on Thursday.
On Friday, the Euro STOXX 600 fell 1.5 percent, the FTSE 100 fell 2 percent and Hong Kong’s Hong Kong stock index fell 3 percent.
The worries came as the debate on Wall Street about the prospects for the US economy turned decidedly bleak this week. Investors again revised their expectations of how higher interest rates might go.
Federal Reserve Chairman Jerome H. The shift comes after Powell, speaking to lawmakers on Tuesday, said the Fed may have to raise interest rates more than expected. But with interest rates headed down a steeper path, some investors predict that inflation cannot be beaten without first setting in a recession.
Banks may be particularly vulnerable to rising rates, which may reduce the value of their investment assets. This can affect the ability to raise capital, especially if there is a run on the bank.
Recent concern has focused on Silicon Valley Bank, or SVB, a relatively small company that is a major investor in start-ups. The Santa Clara, Calif.-based bank announced on Wednesday that it will take immediate steps to raise its funds amid a gloomy environment for start-ups and other technology companies. The report prompted a sell-off in SVB shares, which plunged 60 percent, and some venture capital firms suggested investors pull their money out of the bank.
During the year, investors remained optimistic that inflation had peaked and that the central bank’s campaign to raise interest rates, which has dampened economic demand but weighed on the stock market, would soon end. But a steady stream of data showing the economy continues to run hot has reignited fears that rates will rise further than previously thought.
“My view is that the Fed’s policy at this point is doldrums,” said Lauren Goodwin, an economist at New York Life Investments. To bring inflation back to where the Fed is comfortable with a stable economic backdrop, we must first have a recession.
These circumstances make Friday’s report on the labor market an important data point. Coupled with next week’s reading on consumer price inflation, the jobs report will help confirm views on whether the central bank will raise rates by a quarter percentage point or half a percentage point when it meets later this month.
The swing in Wall Street’s thinking this week was evident in two-year U.S. government bond yields. Yields, which closely track expectations for interest rates, told Congress that Mr. After Powell’s testimony, it rose above 5 percent for the first time since mid-2007. By Thursday evening, the yield had fallen to 4.87 percent.
The move in the stock market was not very substantial, although selling increased during the week. The S&P 500 was down more than 3 percent for the week ahead of Friday’s open.
However, stock investors have some reasons to be optimistic.
While yields on the two-year bond rose sharply this week, investors’ expectations of inflation over the same period actually fell. Brad McMillan, chief financial officer of the Commonwealth Financial Network, said there is hope among investors that the central bank will reduce inflation over time, although rates will need to continue to rise to reach that end.
“I see the market saying the Fed is doing what they’re supposed to be doing,” Mr. McMillan said. The yield on the 10-year Treasury note — which reflects long-term projections for growth and inflation — has been relatively steady in recent weeks.
Some bond investors predict long-term rates will fall and inflation will eventually be brought under control. Both moves will benefit the stock market over time.
“Rates will remain high in the short term, but, eventually, markets expect the Fed to bring inflation under control,” Mr. McMillan said.
Some investors pointed to cracks appearing in other parts of the global economy, saying the effects of rising interest rates were taking hold, even if it took some time to show up in the data.
“I think things are slowing down, and the Fed will pause sooner than the market expects,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “But there doesn’t seem to be any scenario where the Fed won’t raise rates in March.”
Erin Griffith And Rob Copeland Contributed report.
