US stock market leading indices saw a highly volatile session on Tuesday. The indices ended lower as a credit rating downgrade on several US banks hurt investor sentiment after Moody’s downgraded ten regional banks in the US and said that it may downgrade another six large US banks. “Investors are flocking to the safety of US Treasuries after Moody’s Investors Service reduced credit ratings for 10 small- and mid-sized banks and issued a warning for the overall banking sector last night, which sparked concerns about a liquidity crunch and the potential for additional failures of financial institutions,” says José Torres, Senior Economist at Interactive Brokers.
A number of regional banks went bankrupt in March 2023 thus igniting fears of future bank collapses and consolidations. The market will be closely looking at cues for future rate hikes as a higher interest rate scenario hurts the bank’s balance sheet. Therefore, the US CPI data due out on Thursday might be an important influencer of investor sentiment and the Fed’s monetary policy outlook.
Silicon Valley Bank declared bankruptcy and was bought out by First Citizens Bank. Moody’s is particularly concerned about a possible recession beginning early next year, which would increase delinquency rates as consumers and businesses falter.
Earlier this month, Fitch had cut the US credit rating from AAA to AA+, citing “the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” in comparison to peers.
Meanwhile, bad economic news from China has started to pour in. China’s 10-year government bond yield remained around 2.7%, close to a one-year low, as dismal Chinese economic data weighed on the outlook and fuelled expectations for further policy easing. Consumer inflation decreased for the first time in more than two years in July, while producer inflation fell for the tenth month in a row, fueling deflationary fears. According to the most recent data, China’s exports fell 14.5% year on year in July, while imports fell 12.4%, the largest loss since February 2020, due to weakening global and domestic demand.
Going forward, four things will weigh on investors’ minds – US inflation data, US Fed outlook on rates and economy, the health of US banks and the Chinese economy. Together, these factors will determine the path the market chooses in the months ahead. Most immediately, all eyes will be on US CPI data for July to be released tomorrow August 10.