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While everyone has been watching the tech sector for signs of a bubble, it’s the banking sector that’s the root cause of a minor market sell-off today..
US banking stocks were notably weak yesterday as investors worried about exposure to bad loans. That spread to Europe on Friday, with Barclays, Standard Chartered, NatWest and HSBC all dragging the FTSE 100 down.
Pockets of the US banking sector including regional banks have given the market cause for concern. Investors have started to question why there have been a plethora of issues in a short space of time and whether this points to poor risk management and loose lending standards. This includes Zions flagging an unexpected loss on two loans and Western Alliance alleging a borrower had committed fraud.
The pullback in UK-listed banks will be sentiment-driven. Investors have been spooked and moved to trim positions in the sector, possibly opting to have lower exposure in case a crisis is brewing. There is no evidence of any issues with the London-listed core banking names, but investors often have a knee-jerk reaction when problems appear anywhere in the sector.
However, investors are watching one London-listed name in the broader financials sector very closely. ICG, formerly called Intermediate Capital Group, was the biggest faller on the FTSE 100 as it has exposure to private credit and asset-backed finance.
In addition to news related to US regional banks, also weighing on sentiment were signs of liquidity pressures in America. Banks tapped the Federal Reserve’s short-term lending facility for more than $15 billion over the past two days, the largest amount borrowed over a two-day period since the Covid pandemic. It looks like banks used this facility because rates were unfavourable on the repo market, potentially linked to the Fed having drained liquidity from the system through its quantitative tightening programme.
When interest rates were low, central banks bought bonds from banks to inject cash into the financial system, called quantitative easing. In recent years, they’ve switched to quantitative tightening which involved letting their bonds and mortgage securities mature without buying replacements. The movements on markets seen this week will pile on more pressure for the Fed to end its quantitative tightening programme.
It’s no surprise that gold has rallied hard this year as investors are increasingly finding more things to worry about. Gold is the comfort blanket in times of stress and it has gone up again today following the banking sector woes.
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...
