European shares record worst week in five months on bank crisis jitters

© Reuters. FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, March 16, 2023. REUTERS/Staff

By Ankika Biswas and Bansari Mayur Kamdar

(Reuters) – European shares erased their early gains on Friday and logged their steepest weekly drop in five months as supportive measures from regulators across the United States and Europe failed to allay fears over a brewing global banking crisis.

The pan-European STOXX 600 closed the day 1.3% lower, dragged by bank, insurance and financial services stocks.

The bank index lost 2.6%, with HSBC (LON:HSBA), BNP Paribas (EPA:BNPP), Allianz (ETR:ALVG) SE and UBS Group losing between 1% and 3%.

A $30 billion lifeline by large U.S. banks for embattled lender First Republic Bank, less than a day after battered Credit Suisse (SIX:CSGN) clinched a mega central bank loan, had boosted the bank index by as much as 2.2% earlier in the day.

Later in the day, SVB Financial filed for a court-supervised reorganization under Chapter 11 bankruptcy protection to seek buyers for its assets.

“Central banks have done the right things in putting an effective backstop in place… it’s just going to take some time,” said Jeffrey Kleintop, chief global investment strategist at Charles Schwab (NYSE:SCHW) & Co.

Euro zone inflation eased a touch in February, figures showed on Friday, but underlying price growth continued to accelerate on a surge in services costs.

“The core CPI is still climbing, making it unclear when the hiking cycle will end… there are some concerns about what will these global central banks do,” Kleintop added.

The benchmark STOXX 600 lost nearly 4% this week, with bank stocks bleeding 11.5%, after the U.S. and European lenders’ meltdown left investors panicking about the financial sector’s health.

Credit Suisse, too, reversed early gains and dropped 8.0%, following a 19% jump in the previous session.

Losing nearly 2% each on Friday, the lender-heavy indexes of Spain and Italy logged their worst weekly losses in over a year and nine months, respectively.

The STOXX 600 index had closed Thursday 1.2% higher, after some back and forth, as the lifeline to Credit Suisse offset concerns around the European Central Bank’s big 50-basis point (bp) interest rate hike. (EU)

Reuters reported that ECB supervisors see no contagion for euro zone banks from the turmoil.

However, investors held tight to bets that banking jitters would rein in the ECB’s ability to jack up borrowing costs going ahead, as the central bank didn’t signal future moves amid an uncertain outlook.

Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and at least two other banks now expect the ECB to deliver a 25-bps hike in May.

Focus now shifts to the Federal Reserve’s meeting next week, with traders now seeing a 67% likelihood of a smaller 25 bps hike in the world’s largest economy.

Among single stocks, BT Group (LON:BT) slid 6.1% after the British telecom regulator delayed the telecoms firm’s fibre pricing decision.