Crisis Narrative Forcing Out All Others in Bank-Obsessed Markets

Is upheaval in the banking sector the prelude to a financial crisis, or just the biggest bump yet on the road to restoring order to the economy? Stock investors clinging to hopes this too shall pass are having their tolerance for pain severely tested.

Snowballing tensions over the banking sector, now gone global after Credit Suisse saw a quarter of its market value lopped off over five hours, torpedoed a nascent rally in equities Wednesday, as systemic risk in the financial system started to blot out the impulse to buy. While US equities pared back the worst of their losses, they still finished lower as warnings of contagion swirled.

Battling narratives over how pervasive a risk bank stress poses to the economy had opened one of the widest gulfs ever between equity and Treasury volatility in the aftermath of three bank failures in the past week. The gap began to shut on Wednesday as fear of everything from a recession to cascading bank runs sent stock investors fleeing.

“If there’s a lack of confidence in the bank sector, which is the lifeblood of the US and every economy, that’s an event risk that equity markets need to react to,” said Anastasia Amoroso, chief investment strategist at iCapital.

The crisis at Credit Suisse, catalyzed by comments from its largest shareholder that it wasn’t open to further cash injections into the beleaguered bank, sparked a rush for havens. Financials in the US were among the hardest-hit, with the sector dropping 2.9%, while energy shares lost 5.4%.

Up-and-down moves in the S&P 500 suggest equity investors have been less willing than their fixed-income counterparts to jettison the bull case. That case is, in condensed form, that government backstops would stanch the impact of failures at lenders whose role in the economy was limited to begin with, while still-flush consumers keep spending.