Stocks Retreat on Bank Stock Weakness and Higher Bond Yields

What you need to know…

The S&P 500 Index ($SPX) (SPY) Tuesday closed down -1.16%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.02% and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.10%.

Stocks on Tuesday retreated, with the S&P 500 falling to a 1-month low and the Dow Jones Industrials dropping to a 4-week low.  Weakness in bank stocks weighed on the overall market after Fitch Ratings warned it may have to downgrade the sector again.  Stock losses accelerated Tuesday afternoon after T-note yields rose on hawkish comments from Minneapolis Fed President Kashkari, who said the Fed may not be done raising interest rates.   

U.S. economic news today was mixed for stocks as Jul retail sales rose more than expected, but the Aug NAHB housing market index unexpectedly declined. 

Concern that China’s faltering economy will drag down global growth weighed on stocks Tuesday after China reported disappointing news on industrial production and retail sales.  Stocks remained under pressure even after the People’s Bank of China (PBOC) unexpectedly cut interest rates Tuesday, which only deepened anxiety about China’s economy. 

U.S. Jul retail sales rose +0.7% m/m, stronger than expectations of +0.4% m/m.  Also, Jul retail sales ex-autos rose +1.0% m/m, stronger than expectations of +0.4% m/m and the biggest increase in 6 months.

The U.S. Aug Empire manufacturing survey general business conditions fell -20.1 to -19.0, weaker than expectations of -1.0. 

The U.S. Jul import price index ex-petroleum was unchanged m/m, stronger than expectations of -0.2% m/m.

The U.S. Aug NAHB housing market index unexpectedly fell -6 to 50, weaker than expectations of no change at 56.

China Jul industrial production rose +3.7% y/y, weaker than expectations +4.3% y/y.

China Jul retail sales rose +2.5% y/y, weaker than expectations of +4.0% y/y and the slowest pace of increase in 5 months.

The PBOC unexpectedly cut the rate on its one-year loans, or the medium-term lending facility, by -15 bp to 2.50% versus expectations of no change at 2.65%.

The markets are discounting the odds at 11% for a +25 bp rate hike at the September 20 FOMC meeting and 38% for that +25 bp rate hike at the November 1 FOMC meeting. 

Global bond yields Tuesday moved higher.  The 10-year T-note yield climbed to a 9-1/2 month high of 4.268% and finished up +2.6 bp at 4.217%.  The 10-year German bund yield climbed to a 5-1/4 month high of 2.737% and finished up +3.5 bp at 2.672%.  The 10-year UK gilt yield rose to a 1-month high of 4.666% and finished up +2.3 bp at 4.589%. 

Overseas stock markets Tuesday settled mixed.  The Euro Stoxx 50 closed down -0.96%.  China’s Shanghai Composite Index today closed down -0.07%.  Japan’s Nikkei Stock Index closed up +0.56%.

Today’s stock movers…

Discover Financial Services (DFS) closed down more than -9% to lead losers in the S&P 500 after CEO Hochschild resigned effective immediately. 

Weakness in bank stocks weighed on the overall market Tuesday after Fitch Ratings said it would have to reevaluate ratings on U.S. banks it covers if it downgrades the industry again.  Comerica (CMA), Citizens Financial Group (CFG), M&T Bank (MTB), and Zions Bancorp (ZION) closed down more than -4%.  Also, KeyCorp (KEY), Truist Financial (TFC), Fifth Third Bancorp (FITB), Lincoln National (LNC), Bank of America (BAC), and Huntington Bancshares (HBAN) closed down more than -3%.  In addition, Wells Fargo (WFC), Franklin Resources (BEN), Regions Financial (RF), and JPMorgan Chase (JPM) closed down more than -2%.

Refining stocks were under pressure after Bank of America Global Research downgraded Marathon Petroleum, Phillips 66, and Valero Energy to neutral from buy.  As a result, Marathon Petroleum (MPC) and Valero Energy (VLO) closed down more than -2%, and Phillips 66 (PSX) closed down more than -1%.

U.S.-listed Chinese stocks moved lower Tuesday after weaker-than-expected economic news on industrial production and retail sales heightened concerns about China’s economy.  As a result, PDD Holdings (PDD) closed down more than -3%.  Also, JD.com (JD) and Alibaba Group Holding (BABA) closed down more than -2%.  In addition, Baidu (BIDU) closed down more than -1%. 

Target (TGT) closed down more than -3% on concerns about its Q2 earnings results that will be reported before the market opens Wednesday.  Target is expected to report Q2 comparable sales fell -3.75%, its first sales decline in four years. 

Tesla (TSLA) closed down more than -2% on concerns about future profitability after it added lower-price versions of its Model S sedan and Model X utility vehicles that cost $10,000 less than their previous base prices. 

Mining stocks were under pressure Tuesday after the price of copper and silver dropped to 1-1/2 month lows.  As a result, Freeport McMoran (FCX) closed down more than -3%, Newmont (NEM) closed down more than -2%, and Southern Copper (SCCO) closed down more than -1%.

DR Horton (DHI) closed up more than +2%, and Lennar (LEN) closed up more than +1% after the most recent 13F filings show Berkshire Hathaway bought positions in the companies in Q2. 

Match Group (MTCH) closed up more than +1% after a 13F filing showed Nomura Holdings reported a position of 6.65 million shares in the company or 2.4% of Match Group’s outstanding stock. 

Home Depot (HD) closed up +0.66% after reporting Q2 comparable store sales fell -2%, a smaller decline than the consensus of -3.64%.

Paysafe Ltd (PSFE) closed up more than +23% after reporting Q2 revenue of $402.3 million, above the consensus of $394.3 million. 

Nvidia (NVDA) closed up +0.43% after UBS raised its price target on the stock to $540 from $475. 

Across the markets…

September 10-year T-notes (ZNU23) Tuesday closed down -7.5 ticks, and the 10-year T-note yield rose +2.6 bp to 4.217%.  Sep T-notes Tuesday dropped to a 9-1/2 month low, and the 10-year T-note yield climbed to a 9-1/2 month high of 4.268%.  Higher European government bond yields pressured T-note prices Tuesday after the 10-year German bund yield rose to a 5-1/4 month high of 2.737%, and the 10-year UK gilt yield rose to a 1-month high of 4.666%. Also, a stronger-than-expected U.S. July retail sales report undercut T-note prices.  T-notes briefly recovered their losses mid-morning and moved higher as stocks tumbled and after the Aug NAHB housing market index unexpectedly declined. 

However, T-note prices fell again Tuesday afternoon on hawkish comments from Minneapolis Fed President Kashkari, who said he's "not ready to say that we're done" raising interest rates, and we're "a long way away from cutting interest rates."

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