Shares throughout the world tumbled for a third straight session yesterday, while European banks lost another four per cent of their value. Financial stocks are being hammered by fears over the sector and a wider economic slowdown. The growing uncertainty has piled pressure on Yellen, whose every word will be closely watched by nervous investors.
“She needs to come across as optimistic without being too hawkish and cautious without being negative,” said Jo Masters, a senior economist at ANZ. “Hawkishness or dovishness could easily exacerbate the current sell-off, tightening financial conditions further.”
David Stubbs from JP Morgan added: “In an ideal world, Yellen would simultaneously be upbeat while taking March off the table. That is a tough thing to pull off.”
Shares in banks sank further into the red yesterday, with Standard Chartered down 5.5 per cent and Barclays down 4.5 per cent, while crisis-hit Deutsche fell by another 4.2 per cent. The German powerhouse has lost 42.5 per cent of its value since the start of the year.
Unicredit, Credit Suisse, Societe Generale, StanChart, Barclays, Bank of America Merrill Lynch, UBS, Credit Agricole, BNP Paribas, Citi, Santander and RBS are all down by more than 25 per cent since 1 January.
“There are concerns that the banking sector is under-capitalised in Europe and credit conditions are sub-optimal,” said Lorne Baring of B Capital Wealth Management, citing rates of insurance against firms going bust (known as credit default swaps). “We are advising our investors to drastically reduce risk and build protection.”
The bearish macro-economic outlook contributed to oil sliding further yesterday, with US benchmark WTI crude crashing six per cent to as low as $27 per barrel.
Measures of interbank stress in Europe have prompted some commentators to compare the current climate with the build-up to the last financial crisis. “It’s similar,” said Andrew Lapthorne, global head of quantitative strategy at Societe Generale. “We’re going into the slowdown with record levels of net debt and that’s a concern.”
Bruce Kasman, from JP Morgan, is more optimistic. “Markets volatility does usually preclude economic difficulties,” he said. “We put recession risks at about 30 per cent.”
In the US, the S&P financial index closed only slightly lower last night, while overall stocks were narrowly in the red.
The dollar fell further, however, touching its lowest level against the yen in nearly one and a half years. Earlier in the day, the yield on Japanese 10-year bonds dropped into negative territory, as investors fled for cover.
Yellen will appear at 3pm today (GMT) in front of the House’s financial services committee, and again tomorrow for the Senate’s banking committee. “Whatever she says it’s going to be a wild session,” said Baring.