Market Averages Dropped 1% After Fitch Signaled Possible Bank Downgrades

Barry Adams
15 Aug, 2023
New York City

Market averages in New York closed down after banks led decliners and lingering uneven recovery in China dominated market sentiment. 

The S&P 500 and the Nasdaq Composite indexes declined as much as 1.5% after China's retail sales and industrial output rose less-than-expected and jobless rate rose in July.  

The ongoing weakness in the property market is at the heart of China's uneven economic recovery and weakness in imports of commodities and energy products.  

Property buyers are increasingly staying on the sidelines on the expectation of further price declines, further denting the market liquidity and exacerbating property developer's debt-heavy balance sheets. 

In other news in Asia, Japan's second quarter GDP soared at an annual pace of 6% largely because of  a jump in net exports and sharp rebound in international tourist arrivals. 

Business investment was flat and private consumption unexpectedly declined 0.5% in the second quarter. 

Private consumption accounts for about 50% of Japan's economy and domestic demand is negatively impacted by the weakening of yen which is lifting the cost of imports. 

Closer to home, preliminary U.S. retail and food services sales rose 0.7% in July, and sales rose for the fourth month in a row. 

Seasonally adjusted but not adjusted for price inflation, retail sales rose 3.2% from a year earlier, the U.S. Commerce Department reported Tuesday.  

The rise in retail sales showed resilient consumer spending despite rate hikes and price increases but investors worry lagging wage growth may finally catch up with consumers amid rising personal debts. 

Banks dropped between 2% and 3% after Fitch Ratings signaled a possible downgrade for the banking sector and a possible rating downgrades for several banks, including large banks. 

Bank of America, BONY Mellon, Citigroup and JPMorgan Chase fell between 2% and 3%. 

Investors are worried that a rating cut will further increase cost of capital for banks and weaken net interest margin and may even cut off some banks from their abilities to borrow in the bond market. 

 

U.S. Indexes & Yields 

The S&P 500 index traded down 1.2% to 4,437.1786 and the Nasdaq Composite fell 1.2% to 13,631.05. 

The yield on 2-year Treasury notes increased to 4.95%, 10-year Treasury notes inched higher to 4.21% and 30-year Treasury bonds edged down to 4.31%. 

Crude oil increased $1.36 to $81.44 a barrel and natural gas prices decreased 6 cents to $2.66 a thermal unit. 

 

U.S. Stock Movers 

Home builders were in focus after Berkshire Hathaway acquired positions in NVR, Lennar and DR Horton, according to a regulatory filing.

DR Horton gained 2.2% to $125.97, Lennar jumped 0.6% to $124.61 and NVR gained 1.7% to $6,262.79 after the diversified conglomerate Berkshire Hathaway took stakes in home builders. 

According to a regulatory filing with the SEC, Berkshire acquired a $726 million stake in DR Horton, $70 million in NVR and $17.2 million in Lennar.  

Discover Financial Services dropped 7.7% to $94.66 after the company announced the resignation of chief executive Roger Hochschild.   

The company's board appointed John Owen as interim president and chief executive and Hochschild will remain as an advisor through the end of the year. 

Home Depot Inc jumped 2.2% to $126.0 after the do-it-yourself retailer reported sales declined 2% to $42.9 billion and comparable sales in the period across the company and in the U.S. declined 2%. 

Sales were under pressure after customers delayed bid-ticket purchases. 

Net income in the quarter declined 9.9% to $4.6 billion from $5.2 billion and diluted earnings per share fell to $4.65 from $5.05 a year ago. 

The retailer reaffirmed its 2023 sales and comparable sales to decline between 2% and 5% and diluted earnings per share to fall between 7% and 13% from a year earlier. 

 

European Markets Turn Volatile After Weak China Data 

European markets inched higher amid growing worries of worsening economic conditions in China. 

European bond yields edged up and UK gilts traded above 4.6% for the second day in a row and French bond yield jumped stayed above 3% for the second week in a row. 

The ruble rebounded after the Bank of Russia lifted its key lending rate after the currency plunged in the previous session. 

The central bank lifted interest rates by 350 basis points to 12% to shore up the currency after an emergency meeting. 

The ruble rebounded from as low as 102 against the U.S. dollar to 95.56 after the rate hike announcement. 

Investors are also awaiting U.S. retail sales data for July and the last batch of earnings from major retailers and tech companies. 

 

Japan GDP Expanded On Positive International Trade 

Japan's GDP expanded for the second quarter in a row on rising exports and falling imports, the government data showed. 

GDP in the second quarter accelerated to 1.5% from the upwardly revised 0.9% increase in the first quarter. 

The economy has been on the mend despite the weak consumer spending but it was the international trade that drove most of the gain. 

Exports in the second quarter rose 3.2% from the previous quarter and imports fell 4.3% in the period, contributing 1.8 percentage point growth.   

Market sentiment was cautious after China reported weaker-than-expected retail sales, investment and unemployment data. 

The People's Bank of China lowered its key lending rates as the property market faces confidence crisis and byers stayed on the sidelines hoping prices to fall further. 

 

China Cut Rates After Weak Economic Data Show Deepening Property Market Stress

The People's Bank of China unexpectedly lowered its one-year medium term lending facility rate by 15 basis points to 2.5%.

The central bank also lowered its seven-day reverse repo rate by 10 basis points to 1.8%, responding to weakening economic backdrop.   

Property investments declined at a faster pace in January to July of 8.5% after falling at 7.9% in January to June, the National Bureau of Statistics reported Tuesday. 

Weak property investment dragged down growth in fixed-asset investment to 3.4% in the first seven months to July from 3.8% in June.

Property accounts for one-fifth of all fixed-asset investment and contributes to about 14% of GDP growth. 

Private investment continues to remain subdued and declined 0.5% in the first seven months, compared to an increase of 7.6% by state owned enterprises. 

From a year ago, industrial production increased 3.7% in July, slower than 4.4% in June and retail sales slowed to 2.5% in July from 3.1% increase in June from a year ago. 

Urban jobless rate rose to 5.3% in July from 5.2% in June and the statistical agency said it will no longer provide youth jobless rate data. 

Youth unemployment rate among 16 to 24 years rose to record high of 21.3% in June from 20.8% in May.  

 

Europe Indexes & Yields

The DAX index increased 0.9% to 15,767.28, the CAC-40 index fell 1.1% to 7,267.70 and the FTSE 100 index fell 1.6% to 7,389.64.  

The yield on German government bonds traded at a new one-month high, lifting yields in the region for other nations as traders assessed inflation risks. 

The yield on 10-year German bonds increased to 2.67%, French bonds traded higher to 3.22%, the UK gilts edged up to 4.62% and Italian bonds increased to 4.33%.

The euro edged lower to $1.093, the British pound to $1.261 and the U.S. dollar fetched 87.76 Swiss cents.

Brent crude decreased $1.01 to $85.07 a barrel and the Dutch TTF natural gas decreased €4.32 to €38.81 per MWh.