NEW YORK: Wall Street’s main stock indices closed sharply lower on Tuesday (Aug 15) after stronger-than-expected retail sales data stoked worries interest rates could stay higher for longer, while US big banks dropped on a report that Fitch could downgrade some lenders.
The Commerce Department report showed retail sales grew 0.7% last month against expectations of a 0.4% rise, suggesting the US economy remains strong.
After the data, traders’ bets of a pause on interest rate increases by the Federal Reserve (Fed) next month stayed intact at 89%, yet analysts said investors were worried rates could stay at current levels longer than anticipated.
Banks saw the brunt of the selling as investors grew more anxious about interest rates. The US Treasury yield curve has been inverted for over a year, with longer-term bonds yielding less than short-term debt instruments. This persistent situation pressures profits that banks can earn on loans.
“We would probably end up with an inverted yield curve for longer than anticipated, even if we don’t end up with an economic recession,” said Sam Stovall, chief investment strategist at CFRA Research.
“That would end up curtailing lending because even if you were my brother-in-law, I wouldn’t want to lend to you at a loss.”
The S&P 500 dropped 1.16% to end the session at 4,437.86 points. The S&P 500 closed below its 50-day moving average for the first time since March.
The Nasdaq declined 1.14% to 13,631.05 points, while Dow Jones Industrial Average declined 1.02% to 34,946.39 points.
A report said rating agency Fitch could downgrade multiple banks. Shares of JPMorgan Chase fell 2.5%, Bank of America fell 3.2% and Wells Fargo dropped 2.3%.
“The story from Fitch about potential downgrades to multiple US banks (is) weighing on sentiment,” said Michael James, managing director of equity trading at Wedbush Securities.
“You combine that with the retail sales figures that were a little hotter than estimates, (it) furthers the potential higher for longer rates scenario from the Fed.”
Shares of regional lenders PacWest Bancorp, Zions Bancorp and Western Alliance Bank slipped between 3.7% to 4.5% after the Federal Deposit Insurance Corp's latest regulatory overhaul proposal.
“Bank ratings can’t be higher than the industry’s rating,” Interactive Brokers’ senior economist Jose Torres wrote in a note to clients.
Downgrading the industry “would then require Fitch to evaluate other banks and potentially lower credit ratings for numerous financial institutions”, he added.
The S&P 500 banking index hit a one-month low, down 2.75%, while the KBW regional banking index also plunged 3.4%.
A downgrade “would recalibrate all our financial measures and would probably translate into negative rating actions” for banks, Fitch analyst Chris Wolfe told CNBC.
Technology stocks fared slightly better, thanks to 0.4% rise in shares of Nvidia after UBS and Wells Fargo lifted their price targets on the stock.
Nvidia posted its biggest one-day percentage since late May in the previous session following bullish comments from Morgan Stanley, with analysts also saying investors were piling into the stock in the run-up to its earnings next week.
US.-listed shares of Chinese companies also dropped with e-commerce firm Alibaba Group down 2% and among those leading the slide after another round of disappointing economic data from
Among other stocks, General Motors fell 2.3% after Berkshire Hathaway cut its stake in the automaker.
Warren Buffett's Berkshire disclosed a new investment in homebuilder DR Horton, which ended 2.9% higher. – Reuters
Source: The Sun Daily
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