Tighter credit conditions lead to a sharp decline in European financial services firms and banks.
The European stock market faced a sharp decline in most of the financial services stocks in Friday’s trading session. Among those financial services firms is Deutsche Bank, whose shares fell by more than 10% after a spike in credit default swaps.
At 11:58 a.m. ET, most European indexes plunged, and the Euronext 100 was down by 1,57%. England’s FTSE 100 fell by 1,17%, Germany’s DAX index declined by 1,54%, France’s CAC 40 was down by 1,59%, and the Swiss market indexes plunged by 0,61%.
If the cost of insuring against default goes up, the underlying asset’s price may also decrease as investors demand higher compensation for the increased risk. When the cost of insuring against the risk of default rises, it usually indicates that the market believes the underlying asset is more likely to default.
In the context of the broader banking and financial system, any increase in the costs of insuring against default will lead to an increase in the market risk indicator, vitality, and instability.
The European Union faces the same challenges as the U.S. economy, including higher interest rates and rapidly rising inflation. In light of recent events, investors fear that pushing interest rates further higher could lead to a tightening credit condition.
This in turn will make lenders more cautious and demand higher rates of return to compensate for the increased risk. This, in turn, can make it more difficult for businesses and individuals to obtain credit, which can have negative implications for economic growth and job creation.
Meanwhile, in the United States, Wall Street’s main indexes declined at the same time, and the risk of a combined credit condition rises. The S&P 500 benchmark was down by 0,23%, Nasdaq futures fell by 0,55%, and the Dow Futures declined by 0,3%.
The Wall Street stock market’s volatile index jumped by more than 4%, noting its third straight day of moving up. The index
When the VIX is high, it suggests that investors are expecting a greater degree of volatility in the stock market over the next 30 days. This can be due to a variety of factors. In this case, it’s more likely driven by changes in interest rates and credit conditions.
Moving to individual stocks, there are rumors that the USB bank and the Credit Suisse bank are under investigation by the American authorities. The spread of the rumors resulted in a sharp drop in the price of USB shares on the stock market.
Furthermore, investors are frightened by the possibility of further declines in U.S. banks’ liquidity and loans. As a result, businesses will close, jobs will be lost, and the economy will suffer in a variety of ways. Over the past 12 months, the U.S. Federal Reserve has raised interest rates nine times in a row. With a possibility of five more interest rate hikes.
In an interview with CNN reporter Barkin, the Federal Reserve president of Richmond says that the FED’s decision was the right one. He added that inflation will remain the public enemy No. 1.