Markets are falling due to fears about banks and a weaker economic outlook

Stocks fell on Tuesday, as fears about the health of the financial sector following the collapse of First Republic Bank collided with broader anxiety stemming from signs of a weakening economy.

Some regional banks, which have been under pressure since Silicon Valley Bank and Signature Bank failed in March, took significant hits on Tuesday, shattering the relative calm that prevailed after First Republic was seized and sold to JPMorgan Chase by regulators on Monday.

PacWest’s stock lost more than 20 percent of its value, the worst one-day drop since the banking crisis in March. Western Alliance dropped nearly 20 percent, while Comerica and Zion̵[ads1]7;s Bank posted double-digit percentage declines.

The moves came alongside data showing US manufacturers received fewer new orders than expected in March and a continued cooling of the labor market that month, with job vacancies falling and layoffs rising. Oil prices also fell sharply as the prospect of an economic slowdown is likely to reduce energy demand. The price of a barrel of Brent oil, the international benchmark, fell to around $76, almost the lowest level for the year.

The S&P 500 fell 1.3 percent. Energy shares fell the most, with the sector as a whole down more than 4 percent, followed by financials, down around 2.5 percent.

“The banking problem is going to be ongoing,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “The idea that giving First Republic to JPMorgan would end this, I never believed. There is a real fear of instability and an economic downturn.”

Investors also expressed concern about the Federal Reserve’s meeting on Wednesday, when the central bank is expected to raise interest rates. The Fed has raised interest rates rapidly over the past year in an effort to cool the economy and tame stubbornly high inflation. But higher interest rates have also been the root of problems in the banks.

Some investors worry that pushing interest rates even higher could lead to a new wave of unrest, as consumers shift bank deposits, which earn relatively little interest, to alternatives such as money market funds, which offer higher returns. To retain customers, banks could offer higher interest rates on deposits, but that squeezes their profit margins.

“So far the Fed has seemed pretty blunt,” said Kristina Hooper, chief global market strategist at Invesco. “They are so laser-focused on inflation, which is a rear-view mirror issue, instead of being focused on the damage they can cause by raising prices further.”

Based on market prices, investors still expect the Fed to raise interest rates by a quarter point on Wednesday. But that conviction has weakened somewhat, with bets tipping toward a rate cut as soon as September, an outcome only likely if inflation falls sharply or the economy slips into a severe recession.

The two-year Treasury yield, which is sensitive to changes in interest rate expectations, fell nearly a fifth on Tuesday to below 4 percent, a big move for an asset that typically moves by hundredths of a percentage point each day.

Elsewhere, a survey of banks’ lending conditions published on Tuesday by the European Central Bank showed that eurozone lenders are pulling back from lending at a faster pace than at any time since the European debt crisis in 2011. Concerns about a credit crunch weighing on the economy are also becoming more prominent among politicians in the United States.

Adding to the bleak outlook, US lawmakers have yet to agree on a deal to raise the ceiling on how much debt the government can take on, with administration officials warning it could run out of money by June.

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