Wall Street ended mixed on Friday (Aug 18) and US Treasury yields stabilised after a recent surge, and as investors awaited further interest rate insight from the Federal Reserve (Fed) next week.
Global shares were stuck around two-month lows and Wall Street indices closed nearly flat and narrowly mixed. The Dow Jones Industrial Average ended up 0.08%, the S&P 500 dropped 0.01% and the Nasdaq Composite dipped 0.2%.
The MSCI world equity index, which tracks shares in 45 nations, was last down 0.24%.
Yields on benchmark 10-year US Treasuries stepped back after flirting with 16-year highs earlier in the week. Investors expect the Fed to hold interest rates higher for longer as the US economy continued to show strength.
“August historically has been a weak month for markets, and it isn’t surprising that after a big rally to start the year, that investors would take a breather. The headlines haven’t changed all that much, but the lens with which investors are viewing those headlines has,” said Blake Emerson, a global investment specialist at JP Morgan Private Bank.
Ten-year yields were last at 4.255%, after reaching 4.328% on Thursday. A break above the 4.338% level reached in October would have brought yields to their highest since November 2007.
The dollar index, which tracks the currency versus a basket of six competitors, was down 0.16%. But despite the daily dip, the greenback posted a fifth consecutive week of gains, its longest winning streak in 15 months.
Minutes this week from the Fed’s rate-setting July meeting showed most members of the rate-setting committee continued to see significant upside risks to inflation, suggesting that more hikes are in the pipeline.
Attention now turns to the Fed and other top central banks’ annual gathering in Jackson Hole, Wyoming. Investors will scrutinise a speech from Fed chair Jerome Powell next Friday for clues about the interest rate outlook.
“We view the event as a good opportunity for Powell to start laying the ground for the next step in the Fed’s policy guidance — no longer focused on how many hikes to expect, but rather on rates remaining ‘higher for longer,’” said TD Securities analysts in a note.
Markets are already scaling back rate cuts bets next year.
Oil prices rose, but posted a weekly decline, snapping a seven-week winning streak as China’s slowing economic growth clouded the picture for demand.
For the day, Brent crude was up 0.77% at US$84.85 a barrel. US crude jumped 1.13% to US$81.30 a barrel.
The yen was trading at 145.33 against the dollar, having been hammered this week to a nine-month low of 146.56 per dollar, as yield differentials between the US and Japan widened. It is near levels that sparked an intervention by Japanese authorities late last year.
Global stocks skidded and the dollar jumped on Tuesday after Moody’s cut the credit ratings of 10 small to mid-sized U.S. banks and China’s trade data was worse than forecast in July, raising caution about the economic outlook.
The yuan slid to a three-week low as Asian stocks and the Australian and New Zealand dollars, seen as proxies for Chinese growth, turned weaker. The data also heightened pressure for China to provide fresh stimulus to prop up demand.
The gloom also affected major lenders that were not mentioned by Moody’s, with the broader S&P 500 Banks Index sliding almost 3%.
Investors have scaled down their expectations for future bank earnings, and markets have already priced in some of the factors Moody’s cited, said Mike Mayo, a bank analyst at Wells Fargo.
Moody’s also placed six banking giants, including Bank of New York Mellon, US Bancorp, State Street and Truist Financial, on review for potential downgrades in a move that tempered a still strong outlook for U.S. growth.
Longer term there’s unlikely to be an issue, but rising interest rates and regional banks’ exposure to commercial real estate has cast a cloud over the market, said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.
“Investors are using some of this news to trim positions that have done very well,” he said. “Markets are just going through a period where investors are questioning whether stock prices have run ahead of some of the fundamentals.”
MSCI’s U.S.-centric gauge of stocks across the globe shed 1.13%, while the pan-regional STOXX 600 index in Europe lost 0.31%.
Italy sent shockwaves across the European banking sector by setting a one-off 40% tax on Italian bank profits reaped from higher rates, after reprimanding lenders for failing to reward depositors.
The euro zone bank index fell 3.78% and was on track for its biggest daily fall since the financial turmoil of March.
The Dow Jones Industrial Average fell 416.81 points, or 1.17%, to 35,056.32, the S&P 500 lost 52.39 points, or 1.16%, to 4,466.05 and the Nasdaq Composite dropped 215.61 points, or 1.54%, to 13,778.79.
The S&P 500 is trading around 18.5 times next year’s earnings, and “if we avoid a recession and analysts are right, then the stock market is more fairly valued,” Saglimbene said.
“We are probably in the later stages of this downward revision,” Mayo told Reuters. “This is the toll of higher rates for longer, the potential of a recession. It’s different from what happened in the March crisis, this is more an issue about rates, recession and risk.”
Christopher Marinac, director of research at Janney Montgomery Scott, took a more sanguine view.
“Nothing has changed on U.S. banks,” said Marinac. “Second- quarter earnings proved that banks can experience weak revenues and still have improved capital ratios and stable tangible book value,” he said.
Major Italian banks Intesa Sanpaolo, Banco BPM and UniCredit fell between 5.9% and 9% after the government set a one-off 40% tax on profits reaped from higher interest rates.
Italian lenders weighed on the European bank index, which slid 3.54%.
Citigroup analysts calculated the tax could wipe nearly a fifth off Italian banks’ 2023 net income, while Bank of America estimates showed the measure could generate up to 3 billion euros ($3.3 billion) for the government.