US Stocks Resume Losses, Banks Fall on Fitch's Downgrade Concerns: What's Driving Markets Tuesday?

Sentiment remained depressed on Tuesday, with the U.S. stock market trading in the negative after Monday’s positive session, weighed down by poor Chinese data and a warning from Fitch that it may have to downgrade major US banks, including JP Morgan Chase & Co. JPM.

Higher-than-predicted retail sales in July, rising 0.7% month-on-month compared to the 0.4% expected, failed to rescue stocks.

Minneapolis Fed President Neel Kashkari said the Fed may need to examine more data before deciding on further rate increases. He also remarked on the need to avoid a 1970s-type scenario where the Fed stopped raising rates too soon.

Cues From Tuesday's Trading:

The S&P 500 Index fell 0.8%, breaking below 4,450 points. The Dow Jones Industrial Average lost 300 points or 0.84%, while the tech-heavy Nasdaq 100 fell 0.7%.

The weakest link was again the Russell 2000, with small cap equities falling 1% for the day.

US Index Performance On Tuesday

Analyst Color:

The debt rating downgrade of the U.S. sovereign rating may keep the 10-year Treasury yield above its fair value in the near term, notwithstanding the cooling inflation, said LPL analysts Jeffrey Buchbinder and Lawrence Gillum. The yield on the 10-year Treasury note is at the highest level since October 2022.

“The yield will eventually settle back down in the mid-to-high threes if our forecast is right,” the analysts said. “A Fed pause is increasingly likely in September, which should help send rates down and prop up core bond returns,” they added.

The U.S. debt situation is unlikely to cause the type of market volatility experienced in 2011, Buchbinder and Gillum said. That said, they said stocks have moved a bit past what is justified by fundamentals in the short term and a 5%-10% pullback is overdue.

Tuesday’s Trading In Major US Equity ETFs: In midday trading on Tuesday, the SPDR S&P 500 ETF Trust SPY was 0.8% lower to $444, the SPDR Dow Jones Industrial Average ETF DIA fell 0.9% to $350 and the Invesco QQQ Trust QQQ was 0.6% lower to $368, according to Benzinga Pro data.

All 11 S&P 500 sectors weakened on Tuesday. The worst performer was the Energy Select Sector SPDR Fund XLE, down 2%, followed by the the Financial Select Sector SPDR Fund XLF, down by 1.5%.

The Health Care Select Sector SPDR Fund XLV managed to contain losses, down by 0.2%.

Latest Economic Data:

The Commerce Department reported a 0.7% monthly increase in retail sales for July, surpassing the anticipated 0.4% increase and building on the upwardly revised 0.3% figure in June.

The NY Empire State Manufacturing Index tumbled from 1.1 in July to -19 in August 2023 , considerably below market expectations of -1.

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Stocks In Focus:

• Lucid Group Inc. LCID fell over 5%, pressured by weak performance by EV stocks, with Tesla Inc. TSLA falling nearly 2%.
• Nvidia Corp. NVDA rose 2.2% after rising 6% Monday.
• PayPal Holdings PYPL fell 4% after shareholder Elliott Investment Management sold its entire stake in the payments fintech.
• Discover Financial Services DFS fell over 10% after CEO Roger Hochschild announced his resignation.
• Notable companies reporting after the close include Agilent Technologies, Inc. A, Jack Henry&  Associates, Inc. JKHY and H&R Block, Inc. HRB.

Commodities, Bonds, Other Global Equity Markets:

Crude oil fell 2.2%, with a barrel of WTI-grade crude trading at $80. The United States Oil Fund ETF USO was 2.1% lower to $72.50.  

Treasury yields were steady, with the 10-year yield flat at 4.2% and the two-year yield down by 3 basis points to 4.94%. The iShares 20+ Year Treasury Bond ETF TLT was 0.3% lower for the day. 

The dollar fell, with the U.S. dollar index, which is tracked by the Invesco DB USD Index Bullish Fund ETF UUP, down 0.1%. The EUR/USD pair, which is tracked by the Invesco CurrecyShares Euro Currency Trust FXE, was 0.1% higher to 1.0919.

European equity indexes closed in the red. The SPDR DJ Euro STOXX 50 Etf  FEZ fell 1.2%. 

Gold fell 0.1% to $1,904/oz. The SPDR Gold Trust GLD was 0.2% lower to $177. Silver fell 0.1% to $22.55, with the iShares Silver Trust SLV down 0.1% to $20.70. Bitcoin BTC/USD was 0.4% lower at $29,301.

Staff writer Piero Cingari updated this report midday Tuesday. 

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