A turn in the credit cycle at regional banks

Weakness persisted in the financial sector today, after two regional banks warned of credit issues in their quarterly earnings reports. Safe-haven corners of the market caught an early bid, indicating investors are seeking safety.

Why it matters: For a stock market which has been largely unshakeable but lately a little more tepid, the response could turn significant if selling deepens and sticks around.

What they're saying: First Brands and Tricolor, two recently collapsed firms, are a "warning sign" of a "turn in the credit cycle," writes Alberto Gallo, chief investment officer and founder at Andromeda Capital Management.

• His remarks echo those from JPMorgan CEO Jamie Dimon this week, after the bank disclosed its $170 million charge-off tied to subprime auto lender Tricolor's bankruptcy in its earnings report. Dimon warned that "when you see one cockroach, there are probably more," putting a chill in the market.

Driving the news: Regional bank stocks in particular are under pressure after two reported that they were victims of alleged fraud by borrowers.

• Zions Bancorp dropped 13% after reporting a $50 million charge-off on a loan. Western Alliance said it had filed a lawsuit alleging that a borrower committed fraud.
• On the major bank side, Jefferies Financial slid 11% amid concerns over the its exposure to First Brands. Jefferies has said that any losses or expenses from that exposure can be "readily absorbed."
• Publicly traded but private credit-focused firms also fell yesterday amid concerns about loan health. Apollo Global ended down 5% and Blue Owl Capital ended down 7%.

What we're watching: The next shoe to drop. A number of regional banks are due to report soon, and investors will be looking closely for red flags.

• Business development companies, or BDCs, are also selling off. The ones getting hit most were tied to the likes of First Brands.
• The problem? Those ties were unclear and difficult to identify, Mark Fischer, director of credit research at Octus, tells Axios."This is where the fallout, the contagion, comes from," he says.

💭 Thought bubble: Multiple sources say if they knew the answer to how all this shakes out, they'd be rich, and therefore not talking to reporters like me.