(Bloomberg) -- While all of the initial talk was about Silicon Valley Bank deposits and any potential impact for other banks around the globe, investors now have moved their attention to a much bigger potential contagion victim: the US economy.

Without neglecting the risks within the financial system, some moves over the past days looked overdone if you “only” consider the pure threat of another bank run, especially in Europe.

However, if you consider risks to stocks and sectors beyond just the threat of a bank run, the big decline might not even have started. Stock markets had been sanguine earlier this year about the state of the economy and increasingly priced a no-landing scenario. Now, the hard landing is not only back on the table but it might become a base case fast.

“We are now finally seeing pain from tightening and the SVB event basically triggered a fast-forward into US recession,” says Frederik Hildner, CEO and founder of Confluente Capital.

The Bloomberg US Financial Conditions Index has slumped to the lows seen last year and a further decline is likely. “I am concerned if we are entering a time of much tighter lending standards because that’s what will affect the economy,” said Marketfield Asset Management CEO Michael Shaoul.

Goldman Sachs Chief Economist Jan Hatzius agrees: “It will be hard to be completely confident in the near term that Sunday’s intervention will halt the pressure on smaller banks, who play a large macroeconomic role and could become considerably more conservative in their lending.”

That potentially will create a massive issue for companies as they might lose un-drawn credit lines, while at the same time struggle to get new ones. “The advice I would give people in the business world is to be securing lines of credit from high-quality banks, before you need them. They may not be available,” says Shaoul.

Nomura’s Charlie McElligott calls the latest events an “unintended financial conditions tightening shock.” And it might prevent the banking system from working as a transmission mechanism in the long run, which will have a far more nuanced impact on the economy than visible at this point, McElligott says.

Positioning in markets suggest that steps have already been taken to protect investments for more than a short-term risk event. Factors such as growth and value are being sold, while quality balance sheets and high market capitalization are holding up as the hiding place. Tail-risk hedging is moving up and open interest in VIX call options is at the highest level since 2019.

The risks to the economy from a monetary policy mistake have also increased as the Fed now has to put out two fires with only one bucket of water. Peak Fed-rate pricing is collapsing fast, with the year-end expected rate falling to 4% from 5.5% only a week ago, despite the inflation problem being far from over. “While we agree that more tightening will likely be needed to address the inflation problem if financial stability concerns abate, we think Fed officials are likely to prioritize financial stability for now, viewing it as the immediate problem and high inflation as a medium-term problem,” says Hatzius.

©2023 Bloomberg L.P.