US Bank “Carnage” Drags Down Market

Markets were under pressure today as Wall Street grappled with concerns over the global economy, especially China, and a decline in major U.S. banks. The Dow Jones saw a significant drop of 304 points or 0.8%, with the S&P 500 and the Nasdaq Composite trailing closely with declines of their own.

Several leading U.S. banks, notably JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America, found their shares dipping nearly 2%. This comes on the heels of Fitch’s recent warning that it might need to downgrade the credit ratings of many banks, further exacerbating investor concerns. This is not the first such warning; Moody’s also recently adjusted its ratings for 10 U.S. banks and placed others on alert for possible downgrades in the near future.

Adding to Wall Street’s woes, the SPDR S&P Regional Banking ETF recorded a 2.4% decline. This was primarily influenced by Minneapolis Federal Reserve President Neel Kashkari’s comments on the possibility of more stringent conditions for banks.

Drawing from his experience as a pivotal figure during the 2008 financial crisis, Kashkari expressed reservations about raising interest rates. He commented, “Right now it seems like things are quite stable, that banks have gotten through this reasonably well.” But he warned of the risks if inflation isn’t effectively managed, suggesting that banks could find themselves in a difficult situation, and soon.

“Now, the risk is that if inflation is not completely under control, and that we have to raise rates further from here, to bring it down, that they might face more losses than they currently face today. And these pressures could flare up again in the future.”

On the international front, China’s economic performance failed to meet investor expectations, further souring global investor sentiment. Surprisingly, the People’s Bank of China lowered its interest rates. However, instead of allaying investor concerns, it amplified apprehensions, especially related to China’s real estate market. Scott Ladner of Horizon Investments remarked, “It seems like that’s sort of the conclusion the market is beginning to come to yet again… that the Chinese government is unlikely to stimulate in a way that’s meaningful.”

Despite these concerns, there was a glimmer of positive news. Home Depot, one of the major retailers, reported earnings that exceeded market expectations, pushing its shares up by 1.7%. The market also eagerly awaits financial reports from other retail giants, including Target and Walmart.

Furthermore, in a surprising turn of events, July’s U.S. retail sales data surpassed initial forecasts, showcasing a more robust consumer market than anticipated. The sales increased by 0.7% month-over-month, beating the estimated 0.4% growth rate.

But China and this morning’s banking bombshell completely undid any positive impact that retail sales would have had. Now, stocks are staring down the barrel of a breakout past resistance at the recent S&P daily lows.

A further plunge here could trigger massive selling from short-term bulls, who have been holding out for the hope of a recovery rally. Zero days to expiration (0DTE) bulls have increasingly sold 0DTE S&P 500 put options over the last few weeks, and could soon flip bearish, too, if they’re hit with any further losses. This would allow volatility to spike (as writing puts suppresses volatility), potentially drawing down the general market in the process.


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