Stocks Drop As Bank, Economic Worries Lift Bonds: Markets Wrap

Track the global equity, currency and commodity markets here.

Rita Nazareth

08 Aug 2023, 08:46 PM IST i

Pedestrians in Pudong's Lujiazui Financial District in Shanghai, China, on Saturday, Aug. 5, 2023. China is swarming investors with near-daily announcements of economic support, creating the impression authorities are going full steam to boost growth. But without more specifics, the question is how long the market euphoria can last. Photographer: Qilai Shen/Bloomberg

Show Quick Read

Summary is AI Generated. Newsroom Reviewed

(Bloomberg) -- Stocks fell around the world as traders rushed into bonds after a raft of news on China, Italy and the US fanned worries about the financial system and the global economy.

Financial shares bore the brunt of the selling as Moody’s Investors Service downgraded 10 small and midsize American lenders and said it may do the same with a handful of major firms. Italy’s tax on the industry’s profits erased as much as €10 billion ($11 billion) from the value of the country’s banks. United Parcel Service Inc. — a barometer of global growth — dropped on a bearish forecast. Commodities got hit on disappointing Chinese trade figures.

“As the stock market has rallied pretty much in a straight line since March, investors have become numb to these problems,” said Matt Maley, chief market strategist at Miller Tabak + Co. “The outlook for the economy has not reversed to one that is now looking for strong growth over the rest of this year and into next year.”

The S&P 500 fell about 1%, extending its August losses. All 24 companies in the KBW Bank Index retreated, with the gauge down about 3.5% — its biggest drop since May. Among the lenders that were cut by Moody’s, M&T Bank Corp. slid 3.8% and Webster Financial Corp. declined 3.2%. The firm also adopted a “negative” outlook for 11 banks, including PNC Financial Services Group, which retreated 4%, and Capital One Financial Corp., down 2.3%.

Megacaps remained under pressure, with Microsoft Corp. and Amazon.com Inc. leading losses in the Nasdaq 100. Treasury 10-year yields slid almost 10 basis points to around 4%. The bond market is also bracing for the biggest round of refunding auctions since last year. The dollar rose against all of its developed-market peers. West Texas Intermediate oil slipped to $81 a barrel, while copper hit a one-month low.

Investors also waded through remarks from Federal Reserve officials. Fed Bank of Richmond President Thomas Barkin said despite the efforts, inflation still remains too high. His Philadelphia counterpart Patrick Harker said the Fed may be able to cease rate hikes, barring any surprises in the economy, though rates would need to stay at their current elevated levels for some time.

“We continue to believe that the restrictive policy imposed by the Fed will lead to economic weakness and a correction in the equity market,” said David Spika, president and chief investment officer of GuideStone Capital Management. “Equities continue to be at a valuation that just doesn’t make sense relative to where we are.”

In addition to the economic picture. some traders cited the fact that the equity market is also pulling back after a rally that drove the S&P 500 up almost 20% this year. Sentiment among stock traders rose in July to the highest levels since the start of the year — a short-term bearish sign that historically has signaled a mild decline for US equities in the coming months.

The Bloomberg Intelligence Market Pulse Index, which acts as a contrarian signal, pushed into manic territory in July following three consecutive months in a neutral range. It’s a rare sign that has typically delivered weaker US equity returns over the next three months, with small caps underperforming their larger counterparts, data compiled by BI show.

“We still believe that stocks in general are prone to pullbacks in the magnitude of 5%-10% off the recent highs as we move through the second half of 2023,” said Dan Wantrobski at Janney Montgomery Scott. “Selling pressures will continually push the charts into oversold territory frequently, so be on alert for potentially powerful counter-trend moves in sessions ahead.”

Corporate Highlights:

Palantir Technologies Inc., the software maker that has for years sold artificial intelligence-powered programs to governments, fell after issuing a sales forecast that disappointed Wall Street.
Beyond Meat Inc. dropped after the plant-based burger company said it’s unlikely to hit its goal of becoming cash-flow positive in the second half of the year. The company also trimmed its sales outlook.
Eli Lilly & Co.’s shares shot up as sales of its promising weight-loss treatment blew past expectations and a new study raised the prospect that its drug could benefit heart disease as well.
Dish Network Corp. is proposing to buy EchoStar Corp., the satellite network operator it once owned, in an all-stock deal as billionaire Charlie Ergen works to shift his struggling legacy pay-TV business empire toward a future in wireless communications.

Key events this week:

China CPI, PPI, money supply, new yuan loans and aggregate financing, Wednesday
India rate decision, Thursday
US initial jobless claims, CPI, Thursday
Atlanta Fed President Raphael Bostic pre-recorded remarks for employment webinar, Thursday
UK industrial production, GDP, Friday
US University of Michigan consumer sentiment, PPI, Friday