Just a day after Wall Street breathed a sigh of relief with the rescue of First Republic Bank, a selloff in U.S. regional lenders fueled renewed anxiety over financial stability, sinking stocks across the board and spurring a flight to the safest corners of the market.

For many traders, the timing couldn’t be worse. 

On the eve of the Federal Reserve decision, multiple volatility halts in PacWest Bancorp and Western Alliance Bancorp were seen as disturbing. Both shares were down at least 15 per cent. The financial industry weighed heavily on the S&P 500, which sank almost 2 per cent at one point before trimming losses.

Bearish hedge-fund traders were present in the bout of selling that erupted Tuesday and later prompted long-only investors to sell too, according to a note from John Flood, a partner at Goldman Sachs Group Inc.

“Wall Street is quickly hitting the sell button as banking turmoil appears it is not going away anytime soon,” said Ed Moya, senior market analyst at Oanda. “Risk appetite did not stand a chance as traders focused on lingering doubts over the regional banks, rising recession odds, and growing risks that the U.S. could default on its debt next month.”

All of these factors combined are only deepening a sense of uneasiness among investors about the Fed’s conundrum.

In addition to the financial strains stemming from bank failures, officials remain caught between stubbornly high inflation and data pointing to an economic downturn — such as Tuesday’s JOLTS record of job openings that fell to lowest in nearly two years.

BREWING ANGST

To make matters worse, there’s brewing angst over the U.S. debt ceiling — which only adds to the whole discussion on whether the Fed should pause after hiking in May to prevent a more severe economic recession.

While swaps are still pricing in a quarter-point Fed rate increase on Wednesday, traders have trimmed their bets on a further rate hike — while amping up wagers on cuts before the year is over.

With all those elements in play, it shouldn’t come as a surprise that bonds got heavily bid Tuesday — especially after the selloff of the previous session. Two-year yields, which are more sensitive to imminent Fed moves, plunged as much as 21 basis points to below 4 per cent.

Meantime, Treasury bill yields for June topped 5 per cent in the wake of a warning from Treasury Secretary Janet Yellen that the U.S. government could run into debt-ceiling limitations as soon as the start of next month.

Corporate Highlights:

• Morgan Stanley is preparing a fresh round of job cuts amid a renewed focus on expenses as recession fears delay a rebound in dealmaking.
• Uber Technologies Inc. reported earnings that beat analysts’ estimates, showing that consumers continue to spend more on rides and food takeout.
• Pfizer Inc.’s profit and revenue outpaced analysts’ expectations as demand for its pandemic products persisted.
• Marriott International Inc. reported earnings that beat expectations as consumer demand for vacations continued to make up for slower business travel.
• Tesla Inc. has slightly raised prices of its Model 3 sedan and Model Y sports utility vehicle in the US and China, as the electric vehicle pioneer continues to tweak its pricing policy.

Key events this week:

• ADP employment, S&P global U.S. services PMI, ISM services, Wednesday
• Fed Chair Jerome Powell holds news conference following rate decision, Wednesday
• U.S. initial jobless claims, trade balance, Thursday
• European Central Bank rate decision, followed by ECB President Christine Lagarde’s news conference, Thursday
• U.S. unemployment, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.9 per cent
• The Dow Jones Industrial Average fell 1.1 per cent
• The MSCI World index fell 0.9 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.3 per cent to US$1.1007
• The British pound fell 0.2 per cent to US$1.2476
• The Japanese yen rose 0.7 per cent to 136.48 per dollar

Cryptocurrencies

• Bitcoin rose 3.8 per cent to US$28,722.16
• Ether rose 3.5 per cent to US$1,870.91

Bonds

• The yield on 10-year Treasuries declined 15 basis points to 3.42 per cent
• Germany’s 10-year yield declined five basis points to 2.26 per cent
• Britain’s 10-year yield declined five basis points to 3.67 per cent

Commodities

• West Texas Intermediate crude fell 5.4 per cent to US$71.56 a barrel
• Gold futures rose 1.7 per cent to US$2,026.60 an ounce