Falling bank stocks spark global sell-off as fear of private credit ‘contagion’ hits stocks, dollar

The “contagion” – as ING called it in a note this morning – spread to Nasdaq 100 futures, which fell 1.4% this morning. The VIX “fear” index (which measures volatility) shot up 32% today. It hasn’t been this high since President Trump shook the market with his Liberation Day tariffs in April.

As of yesterday afternoon, few people outside of Utah and Arizona had heard of Zions Bancorporation or Western Alliance Bank. He disclosed lenders who were exposed to between $50 and $60 million in bad loans that were potentially fraudulent.

What happened next was extraordinary: 74 US bank stocks lost $100 billion in market capitalization as the S&P 500 fell 0.63%. “The S&P Regional Banks Select Industry Index fell 6.3% on Thursday, the worst drop since Liberation Day,” RBC’s Peter Schaffrik told clients in a note this morning.

Investors are spooked by the First Brands scandal, in which the auto parts supplier took out more than $10 billion in loans in the private credit market and then went bankrupt.

Although Goldman Sachs, JPMorgan and Citi used their earnings reports this week to insist that their due diligence in rating the loans they make to companies through private credit is diversified and sound, traders are running for the hills this morning.

In Europe, the Stoxx 600 and FTSE 100 lost more than a percentage point immediately after opening.

ING’s Francesco Pesole noted: “Contagion to other risk assets shows not only that markets remain sensitive to regional bank concerns (a legacy of the SVB collapse in 2023), but potentially to the broader credit market, which has been trading at exceptionally tight spreads for the past few months.”

It’s even hurting the dollar, which is down 0.08% this morning and has lost 0.73% of its value against foreign currencies over the past five days, as measured by the DXY index.

“Unlike 2023, risks appear more isolated this time, but could feed a narrative that the US business environment and credit quality are in a worse state than the data suggests, perhaps also due to AI distortions. Expect a lot of scrutiny over upcoming regional bank earnings, and any further effect on US stocks will extend the sell-off. dollar,” Pesole said.

Peter Sidorov and his colleagues at Deutsche Bank told clients that the selling had moved into high-yield credit as investors turned to the safe haven of U.S. government bonds. “Other risk assets also struggled, with US HY credit spreads widening +10 basis points. Treasuries rallied and the 2-year yield fell -7.3 basis points to a three-year low of 3.42%,” he said.

Comments among analysts are gloomy. “For more than a year, within the credit markets, there has been a grudging recognition that there were and are a number of credit problems that could be material and dangerous to the broader economy,” said Andrew Milgram, chief investment officer at Marblegate Asset Management. told the Financial Times.

Finally, banks have unexpectedly borrowed money through the US Federal Reserve’s “repo” mechanism for the second day in a row. Normally they only do it at the end of the month or quarter, The Wall Street Journal said—suggesting that the supply of cash reserves at some banks is tighter than expected.

Here’s a snapshot of the markets before the opening bell in New York this morning:

• S&P 500 Futures they were down 1% this morning. The index closed down 0.63% in its last session.
• STOXX Europe 600 fell 1.58% in early operations.
• The UK FTSE 100 fell 1.61% in early operations.
• Nikkei 225 from Japan fell 1.44%.
• CSI 300 from China fell 2.26%.
• The KOSPI of South Korea It was flat.
• India’s Nifty 50 rose 0.47% before the end of the session.
• bitcoin was reduced to $104.9 thousand.