Nasdaq and Banks lead sell-off, Dollar strengthens

Nasdaq and the Bank sector lead markets lower this morning after credit rating agency Moody’s downgraded several small- to mid-sized banks overnight, and Italy laid a 40% windfall tax on its banks, creating a ripple “risk off” sentiment across all commodity and equity sectors. The Vix, Wall Street’s fear index, rose to its highest level in 3 months. The US dollar strengthened. Oil stabilized around $82 per barrel. More weak Chinese economic data added a fundamental factor to weakness in agricultural and metal commodities.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Moody’s takes an axe to bank credit ratings

Moody’s cut its credit ratings for several small- to mid-sized banks overnight, saying that it could also downgrade ratings of the largest lenders in the US. Larger money center and smaller and regional banks saw prices falling by around 3%, according to the KBW Bank indices. Moody’s cut the ratings of ten banks by a single notch, while indicating that it was placing six other banks on review for potential downgrades. Reuters reports that list of six other banks includes Bank of New York Mellon, US Bancorp, State Street and Truist Financial.

This followed hard on the heels of Fitch recently cutting its US credit rating a notch to AA+, which S&P did so a dozen years ago, leaving Moody’s as the last of the big three agencies to downgrade from AAA+. These downgrades sent a message to investors that there’s a bit more risk in the financial world, with some traders lowering their risk exposure in the equities and commodities. Some of that money moved to the traditional safe-haven markets of the US dollar short-dated Treasury notes.

Italian government penalizes banks for interest rate gains

Italy sent shockwaves through the European banking sector overnight with a 40% tax on interest rate profits, also reprimanding those banks for not rewarding depositors. Bank stocks were down 7% on average. This follows similar action by Spain and Hungary, raising fears that other countries will follow as well. Reuters quotes sources saying that the windfall tax is expected to bring in nearly 3 billion euros, or $3.3 billion US dollars to the treasury. That would be similar to the estimated 2.8 billion euros that came in from a windfall tax on energy companies earlier this year.

Ironically, Italian banks were never credited for not charging depositors for deposits when Europe’s interest rates were negative over the past several years, creating losses for them, but the government wants to confiscate profits when the tables are turned. The market has a way of evening these things out, but government intervention to confiscate profits tends to stifle economic activity and slow growth. It’s largely the profits within these banks that tend to fuel investment, but that fuel will be missing if the profits are confiscated.

China’s exports crumble warning of dire domestic economy

China’s exports fell 14.5% year-on-year in July, worse than the expected 5% decline, was the largest decline since February 2020 when Covid hit, and it followed a 12.4% decline in June. This is a very serious economic problem for China, and reflects the decoupling of Europe and the US from dependency on Chinese imports. It also reflects a decline the value of exported goods.

China’s exports to Europe fell 20.6% year-on-year in July; shipments to the US dropped for the 12th consecutive month by 23.1%. Partly offsetting this, China’s trade with Belt and Road Initiative countries was up by 7.4% year-on-year, including a 51.8% increase with Russia, but that wasn’t nearly enough to offset lost trade with Europe and the US.

While China’s slowing export motor is clearly bad news for its domestic economy, already struggling to recover from the prolonged Covid lockdown. This is bad news for the global commodities sectors – from agricultural commodities to metals and oil – given its reduced domestic demand. Notably, the unemployment rate for 16-24 year old’s hit 21.3% in June, double the rate several years ago, perhaps leading to some unrest.  Political and economic problems might be a hard combination for China to manage.

TODAY’S MAJOR MARKETS

Equity markets sell off on bank credit fears

• Equity markets sold off this morning, with the Nasdaq and Russell 2000 down 1.4% while the S&P 500 was
• Global markets were mixed, with the DAX and FTSE 100 off by 1.1% and 0.4%, respectively, while the Nikkei 225 was p 0.4%
• The VIX, Wall Street’s fear index, rose to 17.6, its highest level since May

Currencies and Bonds see Dollar and short-dated Notes rally

• The dollar index rose 0.4% against a basket of currencies to 102.6
• Sterling and the Euro rose by 0.4% against the dollar, while the Yen was down by 0.5%
• Bonds fell at 10-year Treasuries, to yield 4.02% ,but rallied at 2-year, to yield 4.78% respectively

Commodities weaker on fears over Chinese demand

• Gold prices were 0.5% lower at $1,961 per ounce, while Silver fell 1.8% to $22.8 per ounce
• Crude oil prices saw profit-taking, falling 0.2% to $8.8 per barrel
• December corn continues to find modest buying interest just above key chart support near $4.90, while the hard wheat markets in Kansas City and Minneapolis find support from declining yield prospects for the Northern Plains and Southern Canadian Prairies
• November soybeans fell below the 100-day moving average that had held the market in yesterday's free-fall, but short covering began when traders found few sell-stops below that level ahead of Friday's USDA crop report

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com