New York Stock Market Falls Over 1% Amid Mass Credit Downgrades of US Banks

The three major indices of the U.S. New York stock market all showed a decline of over 1% in the early trading hours on the 8th (local time) as investor sentiment weakened due to the weakness in bank stocks. This followed the impact of international credit rating agency Moody's downgrading the credit ratings of 10 U.S. regional banks and warning of the possibility of downgrades for large banks.

At around 10:32 a.m. on the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, composed of blue-chip stocks, was trading at around 35,032, down 440.84 points (1.24%) from the previous close. The S&P 500 index, which focuses on large-cap stocks, was down 48.02 points (1.06%) to around 4,470, and the tech-heavy Nasdaq index was down 183.55 points (1.31%) to around 13,810.

Currently, all 10 sectors of the S&P 500, except for healthcare-related stocks, are declining simultaneously. The weakness in bank stocks is particularly notable. The SPDR S&P Bank ETF is down nearly 4%. The SPDR S&P Regional Bank ETF is also down over 4%. M&T Bank, which was downgraded, is trading more than 3% lower than the previous close. Webster Financial and BOK Financial are also down around 2.8%. US Bancorp, which is at risk of a future downgrade, fell 4%, and BNY Mellon Bank dropped more than 2%. Amid the weak sentiment in bank stocks, major Wall Street banks such as JP Morgan, Bank of America (BoA), Citi, and Wells Fargo are also showing declines of 2-3% each.

UPS fell more than 1% due to weaker-than-expected sales and guidance. Home Depot and Lowe's declined by 1.5% and 2.3%, respectively, following Telci Group's downgrade of their investment ratings. On the other hand, Eli Lilly surged more than 17% after reporting quarterly earnings per share of $2.11, exceeding expectations.

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Investors are closely watching Moody's downgrade impact on U.S. regional banks, along with weak Chinese trade data and corporate earnings. Economic media CNBC reported that these unfavorable signals are simultaneously worsening investor sentiment today.

According to Moody's, the banks downgraded this time include M&T Bank, Webster Financial, BOK Financial, Fulton Financial, Pinnacle Financial, Old National, Prosperity Bancshares, Amarillo National, Associated Bancorp, and Commerce Bancshares. The credit ratings of these 10 banks were lowered by one notch each. Moody's stated in its report that the downgrade was driven by higher funding costs, potential regulatory capital weakening, and increased risks related to commercial real estate loans due to weakening office space demand.

Currently, Moody's is also reviewing the possibility of downgrades for six banks: US Bancorp, BNY Mellon Bank, State Street, Truist Financial, Northern Trust, and Cullen/Frost. The credit outlooks for 11 banks, including PNC Financial Services, Capital One Financial, Citizens Financial, Fifth Third Bancorp, Regions Financial, Ally Financial, Bank OZK, and Huntington Bancshares, have been changed from 'stable' to 'negative.'

These Moody's downgrades are seen as evidence that the risk stemming from the bankruptcy of Silicon Valley Bank (SVB) earlier this year continues to weigh on the banking sector. Moody's pointed out, "Rising funding costs and declining earnings metrics will weaken profitability, the first buffer against losses," and "asset risks are increasing particularly for small and medium-sized banks." It also warned, "There remains a significant risk of deposit declines across the system in the next quarter," and "If the U.S. enters a recession in early 2024 amid increasing capital erosion risks, the risks will become more pronounced."

Accordingly, voices on Wall Street hope that the Federal Reserve (Fed) will pause interest rate hikes amid the worsening macroeconomic environment. Edward Moya of OANDA said, "Although stocks have fallen, Wall Street is confident that the global economic slowdown will help achieve the 2% inflation target, so it's not that bad," adding, "The chances of rate hikes in September and November continue to decline, while the possibility of rate cuts next year continues to rise."

Patrick Harker, president of the Philadelphia Federal Reserve Bank and a prominent dove within the Fed, suggested that rate hikes are nearing their end. In his speech that day, he said, "Unless there is surprising new data between now and mid-September, we can be patient, hold rates steady, and allow the monetary policy actions we have taken to take effect." However, this statement contrasts with Fed Governor Michelle Bowman's emphasis the previous day on the need for further rate hikes. The Fed has previously raised the U.S. benchmark interest rate to the highest level in 22 years. Harker also added that there will be no rate cuts in the near term.

Market attention is now focused on economic indicators scheduled for this week, including the July Consumer Price Index (CPI) and Producer Price Index (PPI). The importance of inflation indicators has increased following mixed signals from last week's employment report. The U.S. July CPI, to be released on the 10th, is expected to rise 3.3% year-over-year and 0.2% month-over-month. The June CPI increase was the lowest in over two years at 3%, but the July increase is expected to rebound. The July PPI, to be announced the following day, is also forecasted to rebound to positive territory from a 0.1% decline (year-over-year) in the previous month.

Currently, the market largely expects the Fed to hold rates steady in September, buoyed by recent hopes for a soft landing. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market is pricing in over an 86% chance that the Fed will keep rates unchanged at the September FOMC meeting. This contrasts with the June dot plot, which predicted one more rate hike by year-end, as the market favors a hold scenario.

Corporate earnings announcements are also nearing completion. According to FactSet, 89% of S&P 500-listed companies have reported earnings so far, with about four-fifths exceeding Wall Street expectations. The June trade deficit released that day recorded $65.5 billion, down 4.1% from the previous month.

In the New York bond market, the yield on the 10-year U.S. Treasury note is around 4.0%, and the yield on the 2-year Treasury note, which is sensitive to monetary policy, is around 4.76%. Investors are also watching whether the Treasury Department's announcement to increase expected borrowing in the third quarter will affect long-term Treasury yields this week.

The dollar strengthened. The Dollar Index, which measures the value of the dollar against six major currencies, rose more than 0.5% to 102.6. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's "fear gauge," jumped more than 13% to 17.8.

European stock markets also declined across the board. The German DAX index was down 1.18%. The French CAC index fell 0.83%, and the UK FTSE index dropped 0.47%.

This content was produced with the assistance of AI translation services.