Markets are reeling from fears about banks and a weak economic outlook

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

Some regional banks, which have been under pressure since the failures of Silicon Valley Bank and Signature Bank in March, took a significant hit on Tuesday, breaking the calm that had prevailed since First Republic was seized by regulators on Monday and sold to JPMorgan Chase.

PacWest’s stock lost more than 20 percent of its value, its worst single-day drop since the peak of the banking crisis in March. Western Alliance fell nearly 20 percent, while Comerica and Zions Bank both posted double-digit percentage declines.

The moves came with data showing U.S. manufacturers received fewer-than-expected new orders in March and continued cooling in the labor market that month, with job losses and layoffs rising. Oil prices also fell sharply as the prospect of an economic downturn dampened energy demand. Brent crude, the international benchmark, fell to around $76 a barrel, its lowest this year.

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

“The banking crisis will continue,” said Andrew Brenner, head of international fixed income at National Alliance Securities. There are real fears of instability and economic slowdown.

Investors expressed concern ahead of Wednesday’s Federal Reserve meeting, where the central bank is expected to raise interest rates. The central bank has raised rates rapidly over the past year in an effort to cool the economy and control stubbornly high inflation. But high interest rates are a source of trouble for banks.

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Some investors worry that raising rates could trigger another wave of volatility as consumers, earning relatively little on bank deposits, shift to alternatives such as money market funds, which offer higher returns. To retain customers, banks may offer higher interest on deposits, but that cuts into their profit margins.

“So far the central bank appears to be very blunt,” said Christina Hooper, chief global market strategist at Invesco. “They are very laser-focused on inflation, which is a rearview-mirror issue, rather than focusing on the damage they can do by raising rates.”

Based on market prices, investors still expect interest rates to rise by a quarter-point on Wednesday. But that optimism has weakened somewhat, with bets on a rate cut as early as September, an outcome likely only if inflation falls sharply or the economy slips into a deep recession.

The two-year Treasury yield, which is sensitive to changes in interest rate expectations, fell nearly a fifth of a point on Tuesday to below 4 percent, which typically moves about one-hundredth of a percentage point each day.

Elsewhere, A study of bank lending conditions Lenders in the eurozone are pulling back from lending at the fastest pace since the 2011 European debt crisis, published by the European Central Bank on Tuesday. Concerns about a credit crunch weighing on the economy are becoming increasingly important among policymakers in the United States.

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

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