Investors cautious after US banks ratings downgrade

Investors cautious after US banks ratings downgrade
Moody's has cut ratings on several smal-l and mid- tier banks, meanwhile China data is adding to concerns.
AUG 08, 2023
By  Bloomberg

Bonds gained along with the dollar on Tuesday, while stocks fell as fresh concerns around China’s economic recovery and the state of US banks sent investors scurrying for havens.

Miners and carmakers led a drop in the Stoxx Europe 600 index after China’s trade plunged in July as slowing global demand clouded the outlook for exports, while domestic pressures weighed on imports. There were also further signs of trouble in China’s ailing real estate sector: Country Garden Holdings Co.’s stock and bonds plunged, with short-sellers swarming over China’s sixth-largest developer by sales, as scrutiny intensified over its operations and ability to meet debt payments.

Banks were among the leading decliners in Europe after a report by Moody’s Investors Service lowering credit ratings for 10 small and midsize US lenders, with the rating agency signaling it may downgrade major peers. Italy’s surprise tax on “extra profits” for lenders also weighed on the sector. 

US equity futures dropped. The 10-year Treasury yield fell about eight basis points. European bonds also gained, with the 10-year German falling nine basis points. A gauge of the dollar climbed about 0.3%.  

The renewed focus on the banking sector knocked optimism on Wall Street, already dented by the latest comments from a Federal Reserve official that pointed to more rate hikes to tame inflation. Fed Governor Michelle Bowman said Monday that additional hikes “will likely be needed” and that sent yields on the two-year to climb before paring some of its advance.

Investors, rattled by the collapse of a regional banks in California and New York this year, have been watching closely for signs of stress in the industry as rising interest rates force firms to pay more for deposits and bump up the cost of funding from alternative sources. At the same time, those higher rates are eroding the value of banks’ assets and making it harder for commercial real estate borrowers to refinance their debts, potentially weakening lenders’ balance sheets.

The release of the consumer price index from the US due later this week will also provide investors with clues on the Fed’s policy outlook. Fed Bank of New York President John Williams cited the necessity to keep policy restrictive “for some time” — while noting rate cuts may be warranted next year if inflation slows. 

Meanwhile, the bulging sales of Treasuries are about to deliver a major test of investor demand and determine whether a selloff has room to run as the market braces for the biggest round of refunding auctions since last year. The bond market has to absorb a combined $103 billion of 3-, 10- and 30-year auctions before the week is out — up $7 billion from the May slate.

The Hang Seng China Enterprises Index fell over 2%, the worst-performing stock gauge in the region. The greenback gained on concern that China may be relaxing its grip on the yuan, which helps anchor other foreign-exchange rates in Asia. Treasuries rose.

The People’s Bank of China set Tuesday’s yuan reference rate at 7.1565 per dollar, revising an earlier fixing in the morning when it had indicated a stronger fixing of 7.1365. The Chinese central bank has been supporting the currency.

The yen led declines against the dollar among Group-of-10 currencies. Data earlier showed that growth in Japanese workers’ wages unexpectedly slowed in June, clouding prospects for the Bank of Japan’s sustainable inflation goal.

Elsewhere, oil declined ahead of US figures on the outlook and stockpiles as the global market tightened amid OPEC+ supply cuts. Gold was slightly lower.

Key events this week:

  • US wholesale inventories, trade, Tuesday
  • Philadelphia Fed President Patrick Harker speaks, Tuesday
  • China CPI, PPI, money supply, new yuan loans and aggregate financing, Wednesday
  • India rate decision, Thursday
  • US initial jobless claims, CPI, Thursday
  • Atlanta Fed President Raphael Bostic pre-recorded remarks for employment webinar, Thursday
  • UK industrial production, GDP, Friday
  • US University of Michigan consumer sentiment, PPI, Friday

Some of the main moves in markets:

STOCKS
  • The Stoxx Europe 600 fell 0.2% as of 8:12 a.m. London time
  • S&P 500 futures fell 0.3%
  • Nasdaq 100 futures fell 0.4%
  • Futures on the Dow Jones Industrial Average fell 0.2%
  • The MSCI Asia Pacific Index fell 0.8%
  • The MSCI Emerging Markets Index fell 0.9%
CURRENCIES
  • The Bloomberg Dollar Spot Index rose 0.3%
  • The euro was little changed at $1.0992
  • The Japanese yen fell 0.4% to 143.06 per dollar
  • The offshore yuan fell 0.3% to 7.2257 per dollar
  • The British pound fell 0.2% to $1.2757
CRYPTOCURRENCIES
  • Bitcoin rose 0.1% to $29,191.88
  • Ether rose 0.4% to $1,831.79
BONDS
  • The yield on 10-year Treasuries declined eight basis points to 4.01%
  • Germany’s 10-year yield declined 10 basis points to 2.51%
  • Britain’s 10-year yield declined nine basis points to 4.38%
COMMODITIES
  • Brent crude fell 0.7% to $84.78 a barrel
  • Spot gold fell 0.2% to $1,932.99 an ounce

This story was produced with the assistance of Bloomberg Automation.

Latest News

More Americans are invested in the elections than the stock market
More Americans are invested in the elections than the stock market

A substantial number of people in a new 2,200-person survey believe their wealth, their "wallet power" and their retirement timelines are at stake.

Stocks rally to fresh highs as JPMorgan drives bank gains
Stocks rally to fresh highs as JPMorgan drives bank gains

The S&P 500 headed toward its 45th record in the year helped in part by a surprise interest income gain at the Wall Street giant.

Boosting payouts on cash crimps wealth management at Wells Fargo
Boosting payouts on cash crimps wealth management at Wells Fargo

Meanwhile, Wells Fargo’s WIM group reported close to $2.3 trillion at the end of last month.

Another AI-washing case shows where SEC is headed
Another AI-washing case shows where SEC is headed

The Securities and Exchange Commission has focused on "black-and-white" allegations of AI washing, but that could broaden out to a gray area that may loop in more financial services companies, a lawyer says.

High-net-worth giving splits along generational and gender lines, find BofA survey
High-net-worth giving splits along generational and gender lines, find BofA survey

More than nine in 10 HNWIs prioritize charitable giving, but demographics help shape the whys and the hows.

SPONSORED Destiny Wealth Partners: RIA Team of the Year shares keys to success

Discover the award-winning strategies behind Destiny Wealth Partners' client-centric approach.

SPONSORED Explore four opportunities to elevate advisor-client relationships

Morningstar’s Joe Agostinelli highlights strategies for advisors to deepen client engagement and drive success