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Regional banks are weakening as Fed's increased rates

The stock market opened this morning with very low numbers, as contagion fears in the regional bank space were reignited. Investors also digested the Federal Reserve’s 25-basis point rate hike and commentary following its Wednesday meeting. The Dow Jones Industrial Average fell 343 points or 1%. The S&P 500 slid 0.8%, and the Nasdaq Composite dropped 0.5%. The Dow turned negative 0.3% year-to-date this Thursday. Important stocks such as Boeing, Disney, Goldman Sachs, and American Express shares pulled back the Dow.

PacWest stock price declines

Source: Yahoo Finance

Shares of regional bank PacWest (PAWC) tumbled nearly 60% this morning after being halted for volatility. Other regional banks followed PacWest lower. Western Alliance (WAL) also fell nearly 60% as the Financial Times reported, Western Alliance is exploring a potential sale. Indeed, the Arizona-based bank, which had $71 billion of assets at the end of March, has hired advisors to explore its options, according to its closest sources, adding that the bank’s deliberation was at an early stage and might not come to anything. The KBW regional bank index fell as much as 5.5% on Thursday, hitting its lowest level since September 2020.

On Wednesday, Powell and the Fed raised interest rates to their highest levels since 2007, continuing an aggressive rate hike path that has contributed to the credit stress in the financial system. In his press conference, Fed Chair Jerome Powell’s remarks indicated what some economists describe as a “hawkish pause,” likely in June.

Shares of First Horizon (FHN) also slumped 38% at the open, its largest drop since September 2008, as Toronto Dominion Bank (TD) and First Horizon called off their potential merger due to regulatory hurdles. The banks said in a press release that the move was due to uncertainty around when TD would receive regulatory approval for the deal and was not related to First Horizon.

Thursday’s moves come less than a week after First Republic was seized by regulators and sold at a discount to JP Morgan Chase, marking the third failure of a regional bank since the start of March. Indeed, many regional banks deposit outflows in March around the collapse of Silicon Valley Bank, raising questions about the stability of their funding and the value of some assets on their books that were not marked to market.

These recent rate hikes indicate that there is a strong possibility that more regional banks may fail, especially those that invested in long-term Treasury bonds. The “hawkish pause” shall not be interpreted as a full stop on rate hikes. As Jerome Powell indicated in his press conference, he leaves the option of raising rates again in June, and this scenario will only depend on how the economy performs this month. The Fed wants to decrease demand as much as possible, even if this means increasing unemployment. The Fed claims it wants a soft landing, but it does not hide its intention to trigger massive unemployment in order to reduce inflation further. Massive unemployment will inevitably lead to a recession.


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