Markets lower as hedge funds ramp up short selling of regional banks

Stocks tumbled on Tuesday as traders’ fears around contagion in the regional banking sector returned ahead of the Federal Reserve’s rate decision.

The Fed’s two-day policy meeting, which kicked off Tuesday, is expected to conclude with the central bank announcing another quarter-point rate hike on Wednesday. Traders are pricing in a roughly 85 per cent chance of a rate hike.

Weighing on sentiment Tuesday was word from the US Treasury that the country may hit the debt ceiling sooner than expected. Treasury Secretary Janet Yellen warned on Monday that the US may run out of measures to pay its debts as early as June 1, earlier than the late July deadline Goldman was estimating.

The Dow Jones Industrial Average fell 367.17 points, or 1.08%, to end at 33,684.53. The S&P 500 slid 1.16 per cent and closed at 4,119.58. The Nasdaq Composite dropped 1.08%, ending the session at 12,080.51.

Bank shares slid, with the SPDR S&P Regional Banking ETF dropping more than 6 per cent. Traders questioned the stability of smaller regional financial institutions after the crisis that engulfed Wall Street in March and brought about the end of Silicon Valley Bank and First Republic Bank. Regional banks PacWest and Western Alliance declined 27 per cent and 15 per cent, respectively.

Meanwhile, JPMorgan Chase’s shares shed 1.6 per cent, giving back some of its gains from the previous session. A day earlier, JPMorgan shares rose after the takeover of embattled regional First Republic Bank. Other large banks including Goldman Sachs and Citigroup also dropped more than 2 per cent. Bank of America fell 3 per cent.

Are more banking crises coming? Commercial real estate loans could spell trouble for other banks next, according to Berkshire Hathaway’s Charlie Munger. He told the Financial Times that he worries about banks that made “bad loans” to owners of troubled malls and office buildings. They account for about 80 percent of commercial real estate mortgages and 45 percent of consumer lending, according to Goldman Sachs. That leaves them exposed to further drops in office property values and consumer spending — which could lead to a wider credit crunch.

And short sellers are looming large – Hedge funds that bet stocks will fall scored a mammoth return on First Republic’s demise. By last Friday, over a third of the bank’s shares were held by short sellers. And it looks like other targets are in their sights.

Across the sectors, Consumer Discretionary was the best performer, whilst Energy trailed far behind as oil prices continued to slide amid demand-growth concerns.

Futures

The SPI futures are pointing to a 0.6 per cent fall

Currency

One Australian dollar at 7am was buying 66.63 US cents..

Commodities

Gold gained 1.66 per cent. Silver added 1.59 per cent. Copper lost 1.69 per cent and oil dropped 5.42 per cent.

Figures around the globe

Across the Atlantic, European markets closed lower. London’s FTSE fell 1.24 per cent, Frankfurt lost 1.23 per cent while Paris closed 1.45 per cent lower.

In Asian markets, Tokyo’s Nikkei added 0.12 per cent, Hong Kong’s Hang Seng rose 0.2 per cent while China’s Shanghai Composite was closed.

Yesterday, the Australian sharemarket closed 0.92 per cent lower at 7267.

Ex-dividends

Acorn Capital Investment Fund (ASX:ACQ) is paying 4.25 cents fully franked.
Qualitas Real Estate Income Fund (ASX:QRI) is paying 1.1047 cents unfranked.

Dividends payable

New Hope Corp (ASX:NHC)

Sources: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics, CoinMarketCap.

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