Analysis: Banking woes, Fed keeps US market investors on edge

Investors are settling in for a long slog in the U.S. stock market in coming months, braced for more tumult in the banking sector and worries over how the Federal Reserve’s tightening will ripple through the economy.

Banking sector concerns drove sharp moves in financial stocks in the United States throughout the week after the collapse of two US lenders and last weekend’s Swiss-government-orchestrated takeover of troubled Credit Suisse (CSGN.S) by rival UBS (UBSG.S).

Many worry that other nasty surprises are lurking as the rapid series of interest rate hikes the Fed has delivered over the past year dry up cheap money and widen fissures in the economy.

“The market is very nervous at this point and investors are acting first and looking into the nuances later,” said Wei Li, global chief investment strategist at fund giant BlackRock. “It’s understandable because it’s not super clear that this is definitely contained.”

In recent days, investors have focused on German giant Deutsche Bank (DBKGn.DE). The company’s shares have lost around more than a quarter of their value this month, including Friday’s 8.5 per cent fall, and the cost of protecting against a default on its bonds soared, even though few put it in a class with Credit Suisse. “We are not concerned today about counterparty, liquidity issues” with Deutsche, JPMorgan analysts said in a Friday report.

For now, few investors see this year’s events as a repeat of the systemic crisis that swept through markets in 2008, taking down Lehman Brothers and prompting government bailouts of large financial institutions.