Asian shares declined on Tuesday, with heavy selling of banks shares in Tokyo and some other markets, as investors around the world watched to see what's next following the second- and third-largest bank failures in US history.

Direct exposure to the risks from the US failures in Asia seemed slim, at least so far. Still, fears of contagion persisted, sending regional benchmarks lower across the region.

Japan's benchmark Nikkei 225 dropped 2.2 per cent to finish at 27,222.04, extending losses from the day before.

Bank shares plunged. MUFG fell 8.6 per cent, Mizuho Financial Group sank 7.1 per cent and Sumitomo Mitsui Financial Group's shares dropped 9.8 per cent. Tech sector companies also were sold, with SoftBank shares losing 4.1 per cent and Sony Group down 2.8 per cent.

Banks in South Korea and Australia also declined. Australia's S&P/ASX 200 dipped 1.4 per cent to 7,008.90. South Korea's Kospi fell 2.6 per cemnt to 2,349.19. Hong Kong's Hang Seng fell 2.4 per cent to 19,233.51. The Shanghai Composite declined 0.6 per cent to 3,247.81.

“There is escalating tension in the global financial world; this is despite non-US banks' exposure to US regional banks being minimal, with the global systems being well capitalized and flush with liquidity,” Stephen Innes, managing partner at SPI Asset Management, said in a report.

“US financial stress could lead banks of all stripes to retrench lending to the real economy and tighten broader financial conditions, amplifying risk to the broader markets.”

On Monday, Japan's chief government spokesman, Hirokazu Matsuno, told reporters that the impact on Japanese banks would likely be limited. Finance Minister Shunichi Suzuki, echoed similar sentiments Tuesday, stressing that Japan's fiscal system remained stable, stressing the “low likelihood” of any negative effects.

The biggest price declines so far on Wall Street have also been with banks. On Monday, other stocks rose on hopes the bloodletting will force the US Federal Reserve to take it easier on the hikes to interest rates that are shaking Wall Street and the economy.

Investors are worried that a relentless rise in interest rates meant to get inflation under control are approaching a tipping point and may be cracking the banking system.

On Wall Street, the S&P 500 dipped 0.2 per cent to 3,855.76 after whipsaw trading, where it careened from an early loss of 1.4 per cent to a midday gain of nearly that much. The Dow Jones Industrial Average fell 0.3 per cent to 31,819.14, while the Nasdaq composite rose 0.4 per cent to 11,188.84.

The US government announced a plan late Sunday meant to shore up confidence in the banking industry following the collapses of Silicon Valley Bank and Signature Bank since Friday.

The heaviest pressure is on the regional banks a couple steps below in size of the massive, “too-big-to-fail” banks that foundered in 2007 and 2008. Shares of First Republic Bank fell 61.8 per cent, even after the bank said Sunday it had strengthened its finances with cash from the Federal Reserve and JPMorgan Chase.

Huge banks, which have been repeatedly stress-tested by regulators following the 2008 financial crisis, weren't down as much. JPMorgan Chase fell 1.8 per cent, and Bank of America dropped 5.8 per cent.

Some investors are calling for the Fed to make cuts to interest rates soon to stanch the bleeding. Rate cuts often act like steroids for the stock market. The wider expectation, though, is that the Fed will likely pause or at least hold off on accelerating its rate hikes at its next meeting later this month.

That would still be a sharp turnaround from expectations just a week ago, when many traders were forecasting the Fed could go back to increasing the size of its rate hikes to tame stubbornly high inflation.

Higher interest rates can drag down inflation by slowing the economy, but they raise the risk of a recession later on. They also hit prices for stocks, as well as bonds sitting in investors' portfolios.

Prices for Treasurys shot higher as investors sought safety and as their expectations grew for an easier Fed. That in turn sent their yields lower, The yield on the 10-year Treasury was steady at 3.56 per cent, down from 3.70 per cent late Friday. That's a major move for the bond market.

The two-year yield, which moves more on expectations for the Fed, fell to 3.99 per cent from 4.59 per cent Friday. It was above 5 per cent earlier this month.

In energy trading, benchmark US crude lost 91 cents to $73.89 a barrel in electronic trading on the New York Mercantile Exchange. It fell $1.88 to $74.80 a barrel on Monday. Brent crude, the international standard, lost 89 cents to $79.88 a barrel.

In currency trading, the US dollar rose to 133.51 Japanese yen from 133.20 yen. The euro cost $1.0697, down from $1.0734.

comment COMMENT NOW