Latest on global markets and banking crisis

The recent chaos in the banking system may the be catalyst for a recession this summer, according to economists at Fannie Mae, the government-sponsored company that promotes liquidity and stability in the US housing market by purchasing and guaranteeing mortgages.

Fannie Mae's Economic and Strategic Research (ESR) group thinks the collapse of Silicon Valley Bank and Signature Bank could lead to tighter lending standards among regional banks — cooling the economy into recession.

"Bank failures often foreshadow economic downturns," the group said in a report Friday.

Still, the ESR group was careful to differentiate between the current economic situation and the 2008 Financial Crisis.

They predict this downturn will be less severe than 2008 and more akin to the Savings & Loan Crisis from the 1980s — when interest rate rises exacerbated banking system stress and contributed to a modest recession in 1991(read more about that here).

“Inflation has now been joined by financial stability concerns as threats to sustained growth,” said Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae.

“These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening – but this may well be the catalyst for the modest recession we’ve been expecting since April 2022,” he said.

Treasury Secretary Janet Yellen is scheduled to lead a private meeting of financial regulators on Friday amid continued concerns about the health of the banking system.

The meeting, held by the Financial Stability Oversight Council that Yellen chairs, is closed to the press, according to guidance sent Thursday night by the Treasury Department.

The meeting will include Wally Adeyemo, the deputy Treasury secretary. Adeyemo is among the officials leading the department’s response to the bank crisis.

Founded in 2010 as part of the Dodd-Frank law, FSOC monitors the stability of the financial system. The council is comprised of more than a dozen regulators, including the chairman of the Federal Reserve, the Comptroller of the Currency, the chair of the Federal Deposit Insurance Corporation and the chair of the Securities and Exchange Commission.

The Treasury Department typically provides a readout of FSOC meetings. 

Stocks fell Friday morning as shares of Deutsche Bank tumbled, setting off a fresh wave of bank fears.

Shares of Deutsche Bank fell over 10% after the German bank's bond insurance prices surged, which is what happened to Credit Suisse before it crashed.

The pain resonated through the banking sector. The SPDR Regional Banking Equity Traded Fund, which tracks a number of small and mid-sized bank stocks, fell 2.1%. Shares of Wells Fargo and JPMorgan Chase dropped roughly 2% and 1.2%, respectively.

CNN's Fear & Greed Index was at 31, indicating fear in the market.

While the federal and global governments have intervened in recent weeks to contain the banking crisis, investors are still on edge since the rescues don't guarantee that the financial sector is safe.

Investors also continued to digest Treasury Secretary Janet Yellen's testimony before Congress on Thursday, where she stated that the government could intervene again to rescue financial institutions if they threaten to carry systemic risk.

The Dow fell about 160 points, or 0.5%.

The S&P 500 slipped 0.6%.

The Nasdaq Composite dropped 0.5%.

Mortgage rates have taken would-be buyers on a ride this year — and it's only March.

Generally, home buyers can anticipate mortgage rates to move down through the rest of this year as the banking crisis drags on, which could cool down inflation. 

But there are bound to be some bumps along the way. Here's why rates have been bouncing around and where they could end up.

Inflation is still quite high, but it is slowing and analysts are anticipating a much slower economy over the next few quarters — which should further bring down inflation. This is good for mortgage borrowers, who can expect to see rates retreating through this year, said Mike Fratantoni, Mortgage Bankers Association senior vice president and chief economist.

The MBA forecasts that mortgage rates are likely to trend down over the course of this year, with the 30-year fixed rate falling to around 5.3% by the end of the year.

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Another day, another problem to worry about in the banking crisis. The focus of Wall Street's concerns today: Deutsche Bank.

Germany's biggest bank has been a well-known problem child for years. Over the past decade, Deutsche Bank racked up billions of dollars in losses as it struggled to compete with larger Wall Street rivals and paid the price of a string of scandals. It has gone through several strategy changes, major restructurings and mass layoffs over the past five years.

The bank has since rebounded strongly under CEO Christian Sewing, and last month reported its highest pre-tax profit in 15 years.

Earlier this week it reassured investors that it had "near zero" exposure to riskier bonds issued by Credit Suisse that were wiped out under the terms of its emergency rescue by UBS on Sunday.

But as the banking crisis drags on, investors are growing hypersensitive to any perceived weaknesses. When the cost of buying insurance against the risk of Deutsche Bank defaulting soared, that was enough to trigger the latest panic selling.

Deutsche Bank's shares tumbled 13% in Germany, dragging broader markets lower.

The last-minute rescue of Credit Suisse on Sunday may have prevented the banking crisis from exploding, but it's a raw deal for Switzerland, and isn't risk free.

The tie-up with its larger rival, UBS, offered the best chance of restoring stability in the banking sector, and protecting the Swiss economy in the near term.

But it leaves Switzerland exposed to a single massive financial institution, even as there is still huge uncertainty over how successful the mega merger will prove to be. Thousands of job losses are expected.

Taxpayers are on the hook for up to 9 billions Swiss francs ($9.8 billion) of future potential losses at UBS arising from certain Credit Suisse assets, provided those losses exceed 5 billion francs ($5.4 billion). The state has also explicitly guaranteed a 100 billion Swiss franc ($109 billion) loan UBS, should it need it.

Switzerland's Social Democratic party says the newly created "super-megabank" increases risks for the Swiss economy. 

With a roughly 30% market share in Swiss banking, "we see too much concentration risk and market share control," JPMorgan analysts wrote in a note before the deal was done. They suggested that the combined entity would need to exit or IPO some businesses.

The problem with having one single large bank in a small economy is that if it faces a bank run or needs a bailout — which UBS did during the 2008 crisis — the government's financial firepower may be insufficient. 

UBS is in a much stronger financial position than it was in 2008 and it will be required to build up an even bigger financial buffer as a result of the deal.

"Having been chief financial officer [at Morgan Stanley] during the last global financial crisis, I'm well aware of the importance of a solid balance sheet. UBS will remain rock-solid," UBS chairman Colm Kelleher said Sunday.

In a call with analysts, CEO Ralph Hamers said UBS would try to remove 8 billion francs ($8.9 billion) of costs a year by 2027, 6 billion francs ($6.5 billion) from cutting jobs.

According to Andrew Kenningham of Capital Economics, the "track record of shotgun marriages in the banking sector is mixed." 

"Some, such as the 1995 purchase of Barings by ING, have proved long-lasting. But others, including several during the global financial crisis, soon brought into question the viability of the acquiring bank, while others have proven very difficult to implement."

In the wake of Silicon Valley Bank's collapse and subsequent banking meltdown, cash is king. The turmoil inflicted on financial markets has sent cautious investors running away from volatile markets and toward more liquid alternatives. 

Money market funds, widely thought to be one of the safest, lowest-risk investment options, have seen an influx of cash in recent weeks as investors look for more stable ground.

These funds invest in short-term securities like government bonds, certificates of deposit — or fixed-term savings accounts — and commercial debt. The goal of a money market fund is to provide investors with a relatively stable investment option that offers higher returns than traditional savings.

But money markets aren't without risks of their own, especially when they experience a large wave of investors all at once.

What's happening: Since the Fed began to raise interest rates a year ago, the amount of money in money market funds has increased by roughly $400 billion. The inflows totaled more than $120 billion alone last week, according to Apollo Global Management. That means a record $5 trillion is currently invested.

Not-so-safe haven: But the more money there is invested in these funds, the greater the risk that cash could also flow out quickly, creating a money-market liquidity crisis — where funds may not have enough cash on hand to meet those redemptions. 

Money market funds are deeply interconnected with the wider financial system, and often face the same risks as banks. 

They typically invest in securities with maturities of 90 days or less, meaning they are very sensitive to changes in interest rates. They also invest heavily in commercial debt — if there's a significant economic downturn the issuers could default on their obligations. 

Stocks: US stock futures fell sharply as a new concern emerged in a bank sector already on edge. Dow futures were down 340 points, or 1%. S&P 500 futures fell 0.9%. Nasdaq Composite futures were 0.6% lower. European markets tumbled, and Asian markets were slightly lower.  

Fear & Greed Index: 31 = Fear 

Oil & gas: US oil prices were down 3.5% to $67 a barrel. Average US gas prices held steady at $3.44 a gallon. 

Europe’s banking stocks tumbled Friday in a sign that investors are still nervous that the recent crises at some banks could spill over into the wider sector.

Europe’s Stoxx Europe 600 Banks index, which tracks 42 big EU and UK banks, fell 5% in morning trade. The index is down 19% from its high in late February. London’s bank-heavy FTSE 100 index dropped 2%.

Shares in Germany’s Deutsche Bank (DB) plunged 13.6%, while shares in UBS (ACPTX) and Credit Suisse (AMJL) slid 7% and 7.4% respectively Friday, following falls of 4.3% and 3.6% on Thursday.

The falls in UBS and Credit Suisse come after Bloomberg reported Thursday that the US Department of Justice (DOJ) was investigating whether their staff had helped Russian oligarchs evade Western sanctions.

The DOJ had sent subpoenas to those employees before UBS took over Credit Suisse, according to the report.

Employees at some major US banks are also part of the probe, Bloomberg said.

“Contagion fears are not yet going away — bank shares are lower again this morning and weighing on broader sentiment. Yesterday we witnessed Deutsche Bank credit default swaps blow out,” Neil Wilson, chief markets analyst at trading platform Markets.com, said in a note Friday.