# Banking turmoil means recession fears are creeping back Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2023-03-29 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Global Bank Collapse Sparks Recession Fears Meta Description: Get the latest on SVB, Signature Bank, and Credit Suisse, as experts warn of potential credit crunch and economic slowdown. Stay informed with Reuters. URL: https://financedigest.com/banking-turmoil-means-recession-fears-are-creeping-backhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2023-03-29t060611z1lynxmpej2s05srtroptp4global-banks-svb-deposits-1736814235429-compressed.jpg) (Reuters) – The failures of U.S. lenders Silicon Valley Bank (SVB) and Signature Bank, followed by Credit Suisse’s rescue, and the ensuing turmoil in world markets have re-ignited the recession risks that appeared to have abated just a few weeks ago. Traders now bet the Federal Reserve is practically done [hiking interest rates](https://www.financedigest.com/central-banks-keep-hiking-rates-amid-banking-turmoil.html "Central banks keep hiking rates amid banking turmoil"). Optimism that followed China’s economic reopening and tumbling energy [prices early this year](https://www.financedigest.com/hong-kong-home-prices-drop-15-6-in-2022-snap-13-years-of-gain.html "Hong Kong home prices drop 15.6% in 2022, snap 13 years of gain") has dimmed. “The bigger, medium-term implication, of what’s happened in the last month is that global growth will be far weaker in six months than we thought even just a few weeks ago,” said Mike Riddell, senior fixed income portfolio manager at Allianz Global Investors. Here’s what some closely watched market indicators [say about recession risks:](https://www.financedigest.com/british-doctors-strikes-risk-patient-safety-minister-says.html "British doctors’ strikes risk patient safety, minister says") 1/ CRUNCH TIME? Central bankers are [closely monitoring the potential for banking](https://www.financedigest.com/banking-stability-worries-go-behind-closed-doors-at-imf-world-bank-meetings.html "Banking stability worries go behind closed doors at IMF-World Bank meetings") stress, on top of lending conditions that were already tightening, to trigger a credit crunch. Fed chief Jerome Powell believes [financial conditions have likely tightened more than traditional measures indicate](https://www.financedigest.com/new-research-indicates-confusing-bank-jargon-could-be-fuelling-financial-vulnerability.html "New research indicates confusing bank jargon could be fuelling financial vulnerability"). European Central [Bank boss Christine Lagarde has also said the market turmoil may help fight inflation](https://www.financedigest.com/bank-of-england-still-needs-to-see-the-job-through-on-inflation-pill.html "Bank of England still needs to ‘see the job through’ on inflation: Pill"). Goldman Sachs [reckons the tightening in bank](https://www.financedigest.com/stock-pickers-reckon-its-time-to-move-on-from-central-banks.html "Stock pickers reckon it’s time to move on from central banks") lending standards it expects could subtract at least 0.25 to 0.5 percentage points from 2023 U.S. economic growth, equivalent to the impact of another 25-50 bps of Fed [rate hikes](https://www.financedigest.com/instant-view-ecb-sticks-with-big-rate-hike-even-as-bank-fears-roil-markets.html "Instant View: ECB sticks with big rate hike even as bank fears roil markets"). AXA [Investment Managers](https://www.financedigest.com/french-watchdog-fines-h2o-asset-management-executives-over-tennor-investments.html "French watchdog fines H2O Asset Management, executives over Tennor investments") Chief Economist Gilles Moec noted small and big U.S. [banks were borrowing heavily and holding](https://www.financedigest.com/bank-of-canada-seen-on-hold-even-as-economy-accelerates.html "Bank of Canada seen on hold even as economy accelerates") onto cash, citing Fed data showing bank asset and liability positions as of March 15. There is a sizeable risk that the ongoing [banking trouble](https://www.financedigest.com/explainer-what-are-credit-default-swaps-and-why-are-they-causing-trouble-for-europes-banks.html "Explainer-What are credit default swaps and why are they causing trouble for Europe’s banks?") triggers a ‘sudden stop’ in lending which would then send the economy into the sort of recession which would go beyond what is strictly needed to tame inflation,” he added. GRAPHIC: [Bank stocks](https://www.financedigest.com/stocks-rise-after-bank-sale-fuels-investor-risk-appetite.html "Stocks rise after bank sale fuels investor risk appetite") tumble after SVB, Signature Bank collapse- https://www.reuters.com/graphics/GLOBAL-BANKS/gdpzqkermvw/chart.png 2/ CUTS NOT HIKES As the outlook darkens, traders were betting on Tuesday another Fed rate hike is a coin toss, with over 50 bps worth of rate [cuts priced](https://www.financedigest.com/tesla-posts-record-quarterly-deliveries-after-price-cuts-up-4-from-q4.html "Tesla posts record quarterly deliveries after price cuts, up 4% from Q4") by year-end. ECB [rates are seen peaking](https://www.financedigest.com/bank-of-england-set-to-hike-to-4-as-rate-peak-looms.html "Bank of England set to hike to 4% as rate peak looms") at around 3.4%, down from over 4% in early March This has pushed shorter-dated borrowing costs down. U.S. two-year bond yields have dropped 80 bps in March, so yield curves are less inverted than prior to [SVB’s collapse](https://www.financedigest.com/swiss-regulator-monitoring-banks-and-insurers-after-svb-collapse.html "Swiss regulator monitoring banks and insurers after SVB collapse"). While inverted yield curves, where long-dated borrowing [costs are lower](https://www.financedigest.com/bmw-bets-on-design-and-recycling-not-mining-to-lower-battery-costs.html "BMW bets on design and recycling, not mining, to lower battery costs") than shorter-dated ones, are good recession predictors, inversion has been followed by steepening as past recessions neared. The U.S. two-year/10-year yield curve has steepened over 40 bps this month, the [biggest monthly steepening since](https://www.financedigest.com/uk-firms-plan-biggest-pay-rises-since-2012-to-fill-staff-gaps.html "UK firms plan biggest pay rises since 2012 to fill staff gaps") 2009. GRAPHIC: Inverted U.S. yield curve steepens sharply- https://www.reuters.com/graphics/GLOBAL-MARKETS/egvbyjerdpq/chart.png 3/ [BANK STOCK](https://www.financedigest.com/asian-stocks-rally-as-bank-jitters-calm-alibaba-lifts-mood.html "Asian stocks rally as bank jitters calm, Alibaba lifts mood") ROUT World [shares down just 0.1% in March and still sitting on gains](https://www.financedigest.com/asian-shares-gain-as-fears-about-rapid-fed-hikes-bank-crisis-fade.html "Asian shares gain as fears about rapid Fed hikes, bank crisis fade") this year seem to signal little recession risk, but worries are mounting under the surface. Global bank stocks, which had outperformed the MSCI [World Stock](https://www.financedigest.com/world-stocks-cling-to-upbeat-mood-dollar-stalls.html "World stocks cling to upbeat mood, dollar stalls") Index before the turmoil, are down nearly 15% this month. Sectors sensitive to the growth outlook such as [real estate](https://www.financedigest.com/gold-london-real-estate-and-the-theresa-may-effect.html "GOLD, LONDON REAL ESTATE AND THE THERESA MAY EFFECT") and oil and gas are also now underperforming. Banking woes have also pushed up the risk premium on corporate debt. Euro high [yield spreads over risk-free rates](https://www.financedigest.com/wall-st-indexes-mixed-treasury-yields-tick-up-as-higher-rates-loom.html "Wall St indexes mixed, Treasury yields tick up as higher rates loom") for example jumped 140 basis points from March 9 to March 20. Still, those spreads remain below highs touched last year and far below levels reached during the 2020 COVID-19 pandemic, suggesting recession concerns in [credit markets appear limited](https://www.financedigest.com/credit-suisse-54-billion-lifeline-offers-limited-respite-to-global-banks.html "Credit Suisse billion lifeline offers limited respite to global banks"). GRAPHIC: [Economically sensitive sectors](https://www.financedigest.com/combatting-economic-uncertainty-in-2023-with-the-payments-sector-2.html "Combatting economic uncertainty in 2023 with the payments sector") falter- https://fingfx.thomsonreuters.com/gfx/mkt/myvmobwnmvr/stocks%20march%2028.png 4/ DR. COPPER Copper, nicknamed “Dr Copper” for its track record as a boom-bust indicator, is still up 7% this year. But it has lost some of its early-January gusto, reflecting [market uncertainty and as demand from China – the world’s](https://www.financedigest.com/world-shares-rally-as-china-offers-markets-a-hand.html "World shares rally as China offers markets a hand") largest commodity consumer – hasn’t rocketed as expected after its re-opening. The price ratio of copper to gold – seen as a gauge of risk appetite – [hit its lowest in nearly seven months in March as investors ditched assets more closely linked to the underlying economy](https://www.financedigest.com/uk-economy-set-for-smaller-hit-in-2023-than-previously-feared-imf.html "UK economy set for smaller hit in 2023 than previously feared – IMF") for safe havens. 5/ WHAT RECESSION? [Data is still delivering positive surprises at the highest rate](https://www.financedigest.com/dollar-advances-as-strong-u-s-data-backs-higher-rates-backdrop.html "Dollar advances as strong U.S. data backs higher rates backdrop") since May 2022, a Citi index shows, suggesting economic statistics are not yet flashing a recession warning. U.S. and [euro zone](https://www.financedigest.com/euro-zone-inflation-seen-just-above-ecbs-target-in-2025-poll-shows.html "Euro zone inflation seen just above ECB’s target in 2025, poll shows") business activity meanwhile accelerated more than expected in March. “The (U.S.) data was largely collected after SVB’s collapse, which suggests that the initial negative impact from uncertainty has been modest,” said Kristoffer Kjær Lomholt, head of FX, corporate research and chief analyst at Danske Bank. GRAPHIC: Global business activity strengthened in March Global business activity strengthened in March- https://www.reuters.com/graphics/GLOBAL-ECONOMY/PMI/gkvlwbaonpb/chart.png (Reporting by Yoruk Bahceli, Naomi Rovnick, Chiara Elisei, Amanda Cooper, additional reporting by Peter Hobson; Compiled by Yoruk Bahceli; Graphics by Vincent Flasseur; Editing by Dhara Ranasinghe and Andrea Ricci) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---