US stocks experienced a downturn on Tuesday, largely driven by a slump in the banking sector, as investors considered recent ratings downgrades and looked ahead to the forthcoming Jackson Hole economic conference. The S&P 500, a key measure of Wall Street’s performance, concluded the day with a 0.3% decline, primarily influenced by a drop in financial stocks, which pulled down the broader index along with several other sectors.

In a significant move, Standard & Poor’s (S&P) downgraded the ratings of five US regional banks, including Associated Banc-Corp, Comerica, KeyCorp, Valley National, and UMB Financial. The ratings agency assigned these banks a “stable” outlook, citing challenging operating conditions. This action followed a similar step taken by Moody’s earlier in August when it downgraded the ratings of ten midsized US banks and placed six others under review.

The repercussions of these downgrades were evident in the market, with all of the banks except UMB Financial ending the day with declines of over 4%. UMB Financial closed approximately 3% lower. S&P’s review considered various factors such as changes in deposits and funding costs, loan-to-deposit ratios, reliance on wholesale funding, and exposure to commercial real estate.

Larger financial institutions also experienced declines, with JPMorgan, Citibank, and Bank of America all seeing drops of at least 2%. Goldman Sachs recorded a 1% decline, and Morgan Stanley’s stock fell by 1.5%.

These setbacks were mirrored in the KBW banking index, which showed a decline of 2.6%, and the more focused regional index, which fell by 2.7%.

Another notable decliner during the trading session was Charles Schwab, with its stock sliding 5%. The brokerage revealed its plans for cost-cutting measures, including a reduction in workforce and operating costs.

Investor attention was also directed towards the upcoming economic policy conference in Jackson Hole, Wyoming, where central bankers from around the world were set to gather. All eyes were on Federal Reserve chair Jay Powell’s speech, as market participants sought insights into the future trajectory of US interest rates.

Padhraic Garvey, regional head of Americas research at ING, highlighted the general anticipation for a slightly more hawkish tone from the Fed chair, signaling a resistance to the assumption of future rate cuts. This sentiment arose in light of robust recent economic data in the US, leading to a reevaluation of rate expectations and the belief that the central bank might maintain elevated benchmark rates for an extended period.

The dollar index, often boosted by expectations of higher rates, reached its highest intraday level since mid-June against a basket of six major currencies.

In the government bond markets, the two-year Treasury yield, which responds to policy shifts, rose by 0.06 percentage points to just over 5%, its highest level since early July. The benchmark 10-year yield saw a marginal decrease of 0.01 percentage points to 4.33%, resulting in a slight rise in price.

Turning to equities, the tech-focused Nasdaq Composite index inched up by 0.1%, building on gains from the previous session. However, chipmakers experienced a dip, with the Philadelphia Semiconductor index slipping by 0.9%. Nvidia, set to report second-quarter earnings on Wednesday, saw a decline of 2.8%.

Across the Atlantic, European markets displayed a different trend. The Stoxx 600 increased by 0.7%, with France’s Cac 40 and Germany’s Dax gaining 0.6% and 0.7%, respectively. Notably, the Stoxx Europe 600 Technology index posted a notable gain of 2%, attributed to the valuation of British chip designer Arm at $64 billion in an internal transaction.

Photo Source: Google

22nd August 2023

Delino Gayweh

Serrari Financial Analyst