Global Markets Closed Down After Bank Worries Resurfaced

Barry Adams
08 Aug, 2023
New York City

Market averages rebounded from the lows of the session and bank stocks closed down after Moody's lowered its outlook for regional banks. 

Stocks were under pressure for the second day in a row on the worries that rising rates and looming economic slowdown could be a double whammy for regional and smaller banks. 

Regional banks have a larger exposure to commercial real estate and with rising rates banks have higher cost of retaining bank deposits. 

Commodities and resource sector stocks were also in focus after China reported a third monthly decline in exports and imports also fell in double digits in July. 

Crude oil and base metal prices traded volatile with a downward bias. 

Treasury yields edged down and bond yields declined worldwide following the weak international trade data from China. 

 

Moody's Downgraded Several Banks on Capital Worries

Moody's Services lowered its ratings on 10 small and regional banks and placed large banks on its negative watch lists. 

In  wide ranging alert about the banking industry, the rating agency belatedly highlighted fast developing stress for small to large banks as rates continue to rise. 

Banks are heading into perfect storms as depositors flee for higher rates to other forms of investments, undeclared losses mounted in the securities held by banks and impending recession in early 2024 is likely to create additional headwinds to credit quality. 

Moreover, commercial real estate loans are facing investor discontent on growing worries linked to elevated office vacancy rates and default worries. 

“U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets,” Jill Cetina and Ana Arsov said in the Moody's research report. 

Moody's placed Bank of New York Mellon, Cullen/Frost Bankers, Northern Trust, Truist Financial, U.S. Bancorp and State Street under review for a possible downgrade.  

Most banks reported flat or modest decline in deposits but deposit mix worsened and banks paid higher rates to retain deposits. 

Moody's also lowered outlook for 11 banks including Capital One, Regions Financial Corp, Fifth Third Bancorp and Citizens Financial. 

"In the current high-rate environment, banks with sizable unrealized losses that are not reflected in their regulatory capital ratios are vulnerable to a loss of confidence. Additionally, a higher share of fixed-rate assets on the balance constrains a bank's profitability and, thus, its ability to grow capital and continue lending. 

Risks may be more pronounced if the US enters a recession – which we expect will happen in early 2024 – because asset quality will worsen and increase the potential for capital erosion," Moody's analysts noted in the research report. 

 

China Exports Declined 3rd Month In a Row 

China reported exports declined for the third month in a row and trade surplus also fell after imports also fell in July. 

Exports declined 14.5% to $281.7 billion and imports fell 12.4% to $201.1 billion resulting in a trade surplus of $80.6 billion from $102.7 billion a year ago. 

Politically sensitive exports to the U.S. fell 23.1%, ASEAN countries 21.4% and to the EU declined 20.6%. 

Exports of rare earth materials, critical for electric batteries. in July soared 49% from a year earlier to 5,426 metric tons, supported by strong international demand for battery powered vehicles and wind power systems. 

The sharp fall in imports was noticed by commodities market and copper and other base metal prices came under pressure and weak exports also highlighted the slowing global demand for Chinese products and reorienting of global supply chains away from China. 

 

U.S. Indexes & Yields 

The S&P 500 index traded down 0.5% to 4,495.73 and the Nasdaq Composite futures fell 0.9% to 13,865.60. 

The yield on 2-year Treasury notes decreased to 4.74%, 10-year Treasury notes inched lower to 3.99% and 30-year Treasury bonds edged down to 4.17%. 

Crude oil decreased $0.97 to $82.87 a barrel and natural gas prices increased 7 cents to $2.74 a thermal unit. 

 

U.S. Stock Movers 

Banks led decliners in trading after the Moody's placed several banks on negative watch list. 

M&T Bancorp declined 3.2% to $137.19, Regions Financial fell 2.2% to $20.69, Citizens Financial Group decreased 3.2% to $30.39 and PNC Financial Services dropped 3.5% to $127.79. 

United Parcel Services, Inc declined 0.8% to $180.59 after the parcel delivery company reported weaker-than-expected revenue in the second quarter. 

The company also lowered its full-year outlook citing macroeconomic headwinds. 

Chegg Inc increased 6.3% to $10.66 after the online education and text book provider reported  better-than-expected revenue in the second quarter. 

Datadog Inc plunged 18.3% to $86.65 after the cloud computing monitoring services provider forecasted weaker-than-expected sales in the third quarter and lowered its full-year outlook. 

 

European Markets Dropped After Italy Imposed Windfall Tax On Banks 

European markets turned lower following worries of global economic growth and windfall tax on banks in Italy. 

Market indexes in Frankfurt, Paris, London and Milan declined after Italy imposed windfall tax on excess earnings this year and finance tax cuts and financial support for first time home buyers. 

The decision surprised markets and banks in the region dropped as much as 3% in Germany, France and Spain. 

 

Europe Indexes & Yields

The DAX index decreased 1.1% to 15,774.93, the CAC-40 index fell 0.7% to 7,269.47 and the FTSE 100 index dropped 0.4% to 7,527.42.  

The yield on 10-year German bonds decreased to 2.43%, 8rench bonds traded lower to 3.00%, the UK gilts edged up to 4.35% and Italian bonds decreased to 4.14%.

The euro edged lower to $1.095, the British pound to $1.271 and the U.S. dollar fetched 87.67 Swiss cents.

Brent crude decreased $0.93 to $85.87 a barrel and the Dutch TTF natural gas increased €0.56 to €31.05 per MWh.

 

Europe Stock Movers

Italian banks dropped after Italy placed 40% windfall tax on banks to finance tax cuts and financial support to first time mortgage holders. 

UniCredit SpA declined 6.9% to €21.06 and Intesa Sanpaolo SpA dropped 8.5% to €2.34. 

Banks in the region declined following the windfall tax announcement. 

Commerzbank, Dresdner Bank, Banco Santander and BNP Paribas dropped between 2% and 3%. 

Bayer AG declined 1.9% to €51.40 after the German chemical company reported a net loss of €1.9 billion in the second quarter. 

Mining companies traded down after Glencore reported profit nearly halved from a year ago and China's exports and imports declined in July. 

Glencore dropped 4.2% to 437.80 pence after the company reported half-year profit plunged 50% from a year ago. 

Anglo American and Antofagasta declined between 1.5% and 2.0%. 

Abrdn Plc dropped 8.4% to 200.20 pence after the asset management company reported a decline in its assets under management.