Bank Downgrades Trigger Stock Sell-Off; Treasuries, Dollar Rally Amid Safe-Haven Demand: What's Driving Markets Tuesday?

Tuesday marked a risk-off session, dominated by concerns surrounding U.S. banks, which were hit by a wave of downgrades from Moody’s. The credit ratings of 10 small and medium-sized institutions were lowered by a notch, and the rating agency issued a warning of potential downgrades for an additional six major U.S. banks.

The VIX jumped 10%, to its highest since late May, with all major indices and sectors trading in the red with the sole exception of health care. Macro themes are overtaking the market, overshadowing for the moment the positive earnings season that continues for corporations.

The sell-off did not spare Europe after the Italian government announced a surprise tax on banks’ windfall profits. Investors flocked to safe-haven assets, with Treasuries rallying and the dollar advancing on the FX market.

Cues From Tuesday's Trading:

The S&P 500 fell nearly 1%, briefly hitting the lowest level since June 12. The Dow slipped by 270 points or 0.8%. Both the tech-heavy Nasdaq 100 and the Russell 2000 tumbled 1.4%.

US Index Performance On Monday

Analyst Color:

Stocks have moved a bit past what is justified by fundamentals, said LPL Financial analysts Jeffrey Buchbinder and Quincy Krosby. The analysts, however, acknowledged the economy's impressive resilience.

“The July jobs report fits the soft landing narrative, though a mild and short-lived recession beginning within the next six to nine months still appears more likely than not,” they said.

Factoring in an “increasingly likely” Fed pause in September, the analysts said they recommended a “neutral tactical allocation to equities, with a modest overweight to fixed income funded from cash.”

LPL favors developed international equities over emerging markets and large caps over small caps, and maintained the industrials sector as its top overall sector pick.

Tuesday’s Trading In Major US Equity ETFs: In midday trading on Tuesday, the SPDR S&P 500 ETF Trust (NYSE:SPY) was 0.9% lower to $446.8, the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) fell 0.8% to $351.90 and the Invesco QQQ Trust (NASDAQ:QQQ) was 1.4% higher to $370, according to Benzinga Pro data.

Almost all U.S. equity sectors were negative, except for the Health Care Select Sector SPDR Fund (NYSE:XLV), which was 0.2% higher.

The worst performers were the Technology Select Sector SPDR Fund (NYSE:XLK) and the Financial Select Sector SPDR Fund (NYSE:XLF), both down by 1.4%.

Latest Economic Data:

Philadelphia Fed President Patrick Harker, who is also a member of the Federal Open Market Committee, delivered dovish remarks. The policymaker said the Federal Reserve could adopt a patient approach and maintain interest rates at their current levels, barring alarming new data by mid-September.

Harker’s projections suggest the core PCE could decline to slightly under 4% by the conclusion of 2023, dipping below 3% in 2024 and aligning with the 2% target in 2025. He indicated a potential scenario where rate cuts might commence sometime next year.

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Stocks In Focus:

• Eli Lilly & Co. (NYSE:LLY) jumped 15%, on track for its best daily performance since June 2020, as a result of strong Q2 results.
• Lucid Group, Inc. (NASDAQ:LCID) moved up over 6.5%, despite missing both EPS and revenue estimates, as the company revealed production progress.
• International Flavors and Fragrances Inc. (NYSE:IFF) tumbled 19%, marking the worst performance among S&P 500’s stocks, as the company announced disappointing results last quarter.
• Datadog, Inc. (NASDAQ:DDOG) plummeted 18%, despite beating Street’s estimates, as the company revealed a weaker outlook.
• Companies reporting after the close include Akamai Technologies, Inc. (NASDAQ:AKAM), Rivian Automotive, Inc. (NASDAQ:RIVN), Twilio, Inc. (NYSE:TWLO), Upstart Holdings, Inc. (NASDAQ:UPST) and Lyft, Inc. (NASDAQ:LYFT).

Commodities, Bonds, Other Global Equity Markets:

Crude oil fell 0.3%, with a barrel of WTI-grade crude trading at $82. The United States Oil Fund ETF (NYSE:USO) was 0.2% lower to $73.70.  

Treasury yields fell, with the 10-year yield down by 7 basis points to 4.02% and the 30-year yield down by 8 basis points to 4.2%. The iShares 20+ Year Treasury Bond ETF (NYSE:TLT) was 1.2% higher for the day. 

The dollar rallied, with the U.S. dollar index, which is tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP), up 0.6%. The EUR/USD pair, which is tracked by the Invesco CurrecyShares Euro Currency Trust (NYSE:FXE), was 0.5% lower to 1.0950.

European equity indexes closed in the red. The SPDR DJ Euro STOXX 50 Etf  (NYSE:FEZ) fell 1.7%. 

Gold fell 0.7% to $1,923/oz. The SPDR Gold Trust (NYSE:GLD) was 0.6% lower to $178. Silver fell 1.55% to $22.7, with the iShares Silver Trust (NYSE:SLV) down 1.6% to $20.9. Bitcoin (CRYPTO: BTC) was 2% higher to $29,742.

Staff writer Piero Cingari updated this report midday Tuesday. 

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