U.S. stock market ends mixed as banking fears reignite

The U.S. stock market ended mixed on Wednesday as Swiss bank Credit Suisse's liquidity crisis reignited fears of volatility in the banking sector.

The Dow Jones Industrial Average finished at 31,874.57, losing 280.83 points or 0.87 percent. The S&P 500 closed at 3,891.93, declining by 27.36 points or 0.70 percent. The index previously fell as low as 2.1 percent during the day.

Nasdaq, the only gainer among major Wall Street indexes, closed at 11,434.05 after adding 5.90 points or 0.052 percent. All three indexes previously rallied on Tuesday.

Bank stocks fell after rallying in the previous session. Small to mid-sized banks experienced bigger losses because they are more vulnerable to mass withdrawals from customers. Stocks in larger banks also fell but by smaller margins.

San Francisco-based First Republic Bank shares plunged by 21.4 percent following a 27 percent increase last Tuesday. Meanwhile, JPMorgan Chase slid by 4.7 percent.

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Last week, two well-known regional banks in the U.S., Silicon Valley Bank (SVB) and Signature Bank, were shut down by financial authorities. The bank failures raised concerns about whether there would be a contagion effect on the entire banking system. It caused bank stocks to plummet on Monday.

The government assured that the U.S. banking system was stable and that taxpayers did not need to bear the losses incurred by the failures. The reassurance slightly improved the confidence in the banking sector on Tuesday, with most bank stocks posting gains.

However, banking fears set off again after reports suggested that Credit Suisse's top shareholders were reluctant to provide additional financing to its investment. Earlier, the global investment bank said it found "material weakness" in its financial reports.

Credit Suisse has been facing numerous issues over recent years, including losses it took after the implosion of investment firm Archegos Capital in 2021.

"They've had issues," Anthony Saglimbene, chief market strategist at financial services firm Ameriprise, said. "It's just coming at a time when there's more uncertainty and there's less confidence in the banking system."

Financial markets regained some losses earlier in the day after the Swiss National Bank offered to provide liquidity for Credit Suisse. According to more recent news, Credit Suisse has secured a $54 billion lifeline from the central bank.

In Europe, Credit Suisse shares plummeted 24.24 percent following the reports, a record low for the bank. France's CAC 40 was down 3.6 percent, while Germany's DAX slid 3.3 percent. Britain's FTSE 100 also saw a 3.8 percent loss.

"When you have worries about contagion and a financial crisis, there is increasing risk of a global recession."

Anthony Saglimbene, Chief Market Strategist at Ameriprise

Despite the current crisis in the sector, analysts assured that the situation was "nowhere near as bad" as the financial crisis in 2008. Nevertheless, the fears could create a downturn in the global economy. Saglimbene pointed out that the U.S. crude oil price recently fell below $70 per barrel for the first time since 2021, signaling a weaker economy.

Federal Reserve's upcoming rate policy

Recent volatility in the banking system increases expectations of a more dovish rate policy by the Fed, as noted by analysts, as high-interest rates significantly contributed to the collapse of SVB and Signature. The Fed is expected to opt for a less hawkish policy approach to avoid creating more stress in the financial system.

The market predicts a 25-basis-point hike after the Fed's meeting next week, with the federal funds rate peaking at around 4.7 percent by May. Financial services firm CME also said that the Fed would likely cut interest rates twice by the end of the year.

Previously, the market projected the federal funds rate to peak at over 5.5 percent by next September. Analysts also initially forecast no rate cuts until at least 2024.