Wall St falls as SVB collapse fuels bank contagion fears

March 13 (Reuters) –

U.S. stock indexes fell on Monday as the collapse of Silicon Valley bank fanned fears of a contagion with trading halted in several banks, while expectations rose for a pause in interest rate hikes by the Federal Reserve in March.

The sudden shutdown of SVB Financial on Friday after a failed capital raise triggered concerns about risks to other banks from the Federal Reserve’s sharpest rate hike cycle since the early 1980s.

Regulators over the weekend stepped in to restore investor confidence in the banking system, saying Silicon Valley Bank depositors will have access to their funds on Monday.

“When a step (is taken) this big, this quickly, your first thought is crisis averted. But your second thought is, how big was that crisis, how big were the risks that this step had to be taken?” said Rick Meckler, partner at Cherry Lane Investments.

“The only positive for the markets I’ve heard come out of this is the belief that it will slow the rise of rates as the Fed seeks to avoid any bigger damage in the financial sector.”

President Joe Biden said that the administration’s swift actions to help depositors in two U.S. banks should give Americans confidence that the banking system is safe.

Trading in shares of SVB’s peer Signature Bank, which was shut down by regulators on Sunday, was halted.

First Republic Bank dropped 65.1% as news of fresh financing failed to reassure investors, while Western Alliance Bancorp, PacWest Bancorp and Charles Schwab fell 75.9%, 41.0% and 19%, respectively. Trading in the stocks was halted several times due to volatility.

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Charles Schwab fell 19% on trade resumption after the financial services company reported a 28% decline in average margin balances in February from a year earlier.

Shares of big U.S. banks including JPMorgan Chase & Co , Morgan Stanley and Bank of America fell between 2.8% and 6.3%.

The KBW regional banking index fell 11.2%, while the S&P 500 banks index dropped 7.7%.

The benchmark S&P 500 erased all its year-to-date gains as SVB’s collapse hit investor sentiment already weakened by worries that the Fed could go for a big hike at its meeting next week.

Traders currently see a 50% chance of no rate hike at the Fed’s meeting next week, with rate cuts priced in for the second half of the year.

The projections of a terminal rate have receded to 4.65% by March from around 5.5% in September earlier.

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Goldman Sachs analysts said they no longer expect the Fed to raise rates by 25 basis points at its next policy meeting on March 21-22.

Investors await crucial inflation data due on Tuesday for more clues on the Fed’s monetary tightening plans.

At 9:40 a.m. ET, the Dow Jones Industrial Average was down 120.81 points, or 0.38%, at 31,788.83, the S&P 500 was down 43.09 points, or 1.12%, at 3,818.50, and the Nasdaq Composite was down 121.04 points, or 1.09%, at 11,017.85.

Among individual stocks, Pfizer Inc was up 0.7% after the drugmaker said it would buy Seagen Inc for nearly $43 billion.

Declining issues outnumbered advancers for a 5.01-to-1 ratio on the NYSE and for a 3.39-to-1 ratio on the Nasdaq.

The S&P index recorded no new 52-week highs and 44 new lows, while the Nasdaq recorded 19 new highs and 321 new lows.

(Reporting by Shubham Batra and Amruta Khandekar in Bengaluru; additional reporting by Shreyashi Sanyal Editing by Dhanya Ann Thoppil, Sriraj Kalluvila and Vinay Dwivedi)