On Tuesday, May 3, 2023, U.S. equity markets experienced a significant fall of more than 1%. This was triggered by a decline in regional bank shares, concerns over the financial system’s stability, and speculation over the Federal Reserve’s future interest rate hikes.
Regional Banks and First Republic Bank seizure:
Regional banks experienced significant losses on Monday following the seizure and auction of First Republic Bank. The majority of First Republic Bank’s assets were purchased by JP Morgan Chase & Co in a deal facilitated by the Federal Deposit Insurance Corp (FDIC). This led to PacWest Bancorp experiencing a 27.8% decline, while Western Alliance Bancorp and Comerica Inc faced drops of 15.1% and 12.4%, respectively.
Federal Reserve and interest rate hikes:
Market participants are closely monitoring the Federal Reserve’s announcement tonight regarding a possible 25 basis point hike. There is also speculation on whether this will be the last hike for now, or if further increases may occur if inflation remains high.
Janet Yellen and the government’s payment obligations:
Treasury Secretary, Janet Yellen, has expressed concerns over the federal government’s inability to meet its payment obligations without legislation to raise Washington’s borrowing limit by June 1.
Stock market performance:
The Dow Jones Industrial Average experienced a 1.08% fall of 367.17 points, while the S&P 500 lost 1.16% or 48.29 points, and the Nasdaq Composite declined 1.08% or 132.09 points.
Currency and commodity markets:
The Dollar Index dipped following the release of disappointing U.S. job openings data. The EUR/USD rose 0.25% to 1.1002, while USD/JPY declined 0.73% to 136.50. The GBP/USD was trading at 1.2471, down 0.20% on the day. WTI crude oil futures experienced a significant loss of $4 or 5.29% to $71.66 per barrel, and Brent dropped $3.99 or 5.03% to $75.32. However, gold experienced its biggest daily gain in a month as yields dropped due to renewed fears of contagion in the U.S. banking sector and ahead of the Fed’s rate decision. Spot gold rose 1.8% to $2,016.79 an ounce, and U.S. gold futures gained 1.64% to $2,015.90/oz. Meanwhile, Bitcoin (BTC) and Ethereum (ETH) experienced gains of 3.61% and 3.33%, respectively, in New York overnight.
