Shares of several U.S. regional banks plunged in premarket trading on Thursday as the sector experienced its worst slump since 2008, overshadowing a suggestion by the Federal Reserve that it may soon suspend its policy of interest rate hikes.
California’s PacWest was more than 45% lower before Wall Street opened after the lender said it was approached by potential partners and investors over the course a potential sale. Fellow regional lenders Western Alliance and Metropolitan Bank were down 17% and 15%, respectively.
Silicon Valley Bank, Signature and First Republic have all tumbled since March, with the KBW Regional Banking Index down 31% in the past three months.
Meanwhile, First Horizon’s share price halved in pre-market trading after the Memphis-based lender and Canadian bank TD said regulatory hurdles meant they had mutually agreed to terminate a planned merger.
US futures slipped after the Federal Reserve raised the federal funds rate to a new target range of 5-5.25%, the highest level since mid-2007. Contracts tracking the S&P 500 fell by 0, 4%, and those following the tech-heavy Nasdaq remained steady.
The Fed’s latest statement removed earlier indications that further monetary tightening “may be appropriate” and stressed that its policy stance will depend substantially on economic data.
Speaking after the policy decision, Chairman Jay Powell said the central bank still expects inflation to do so take time to reach its target range. “We on the committee believe that inflation will not come down as quickly. . . if that prediction is substantially correct, it would not be appropriate to cut rates,” he said.
Analysts said the changes to the Fed’s statement could signal the end of the current tightening cycle. But while markets priced in several rate cuts before the end of the year, opinions were mixed on the likelihood of imminent easing as inflation persisted.
“A slowdown, or even a mild recession, may not be enough to convince the Fed to reverse policy any time soon,” said Tai Hui, market strategist at JPMorgan Asset Management.
Ray Sharma-Ong, investment director for multi-asset investment solutions at Abrdn, said problems in the banking sector, such as the recent failure of First Republic Bank, were unlikely to pose a systemic threat, but tightening credit conditions could weigh heavily on US growth and force the Fed to adopt supportive measures.
“With forward guidance from the Fed . . indicating a strong shift towards data reliance, we expect the Fed to cut rates when a recession hits,” Sharma-Ong said.
Across the Atlantic, the European Stoxx 600 fell 0.8% as traders braced for an expected interest rate hike by the European Central Bank.
The ECB is expected to hike interest rates by a quarter of a point to 3.25%, a move that would mark a slowdown from consecutive half-point hikes this year. The euro zone’s headline inflation rate rose for the first time in six months to 7% in the year to April, although core inflation fell for the first time since June 2022.
China’s CSI 300 stock index was unchanged after returning from an extended holiday on Thursday, as were South Korea’s Kospi and Australia’s S&P/ASX 200. Japan were closed for holidays.
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