US bank stocks fall after Moody’s cuts ratings on several midsized lenders

US equities retreated on Tuesday, dragged lower by bank stocks after Moody’s cut the credit rating of several midsized lenders and warned that higher costs could cut into their profitability.

Wall Street’s benchmark S&P 500 fell 0.4 per cent, while the Nasdaq Composite shed 0.8 per cent.

Banks were among the biggest decliners after the ratings of 10 midsized US lenders were cut on Monday night, with Moody’s citing a slowdown in deposits, higher funding costs and asset quality risks, particularly in the commercial real estate sector.

“The banks tend to be a canary in the coal mine for the economy,” said Dana Grigg, president of Camelotta Advisors. “Part of the concern is downtowns in America seem to be ghost towns, and we haven’t really seen any financial repercussions yet, but I think the banks are potentially looking at some real estate losses,” a reference to worries about the outlook for the US commercial property sector.

The news reignited investors’ concerns over the health of the country’s banking sector, which struggled earlier in the year after the collapse of three regional lenders. The KBW Bank index ended 1.2 per cent lower, having been down almost 4 per cent in early trading.

The agency also placed six lenders on review, leaving the door open for more downgrades. Shares of M&T Bank and State Street, both on the Moody’s list, fell 1.5 per cent and 1.6 per cent, respectively.

Financial stocks were also lower in Europe after Italy’s deputy prime minister announced a 40 per cent windfall tax on banks that have recently profited from rising interest rates.

The region-wide Stoxx Europe 600 index ended the day 0.2 per cent lower, with the Stoxx Europe 600 Banks index down 2.7 per cent. The Cac 40 in Paris lost 0.7 per cent and the Dax in Frankfurt fell 1.1 per cent.

Italian lender Intesa Sanpaolo was among the top decliners, down 8.7 per cent, and domestic rival UniCredit fell 5.9 per cent. The shockwaves spread out across Europe. Germany’s Commerzbank dropped 3.3 per cent.

Late on Tuesday night, Italy’s finance ministry said it would limit the impact of its planned windfall tax on banks to ensure financial stability.

Asian markets were lower after data showed China’s exports fell by the most since the beginning of the Covid-19 pandemic, amplifying concerns over the country’s economic growth.

Hong Kong’s Hang Seng index dropped 1.8 per cent, led by declines in consumer goods and property, while China’s benchmark CSI 300 was down 0.3 per cent. 

Official data showed China’s exports declined 14.5 per cent year on year in July, the most since February 2020. The country’s imports fell 12.4 per cent, much higher than the 5 per cent decline forecast in a Reuters poll of economists.

A slowdown in global and domestic demand for goods weighed on the world’s second-largest economy, which is also grappling with a weak property sector. China has struggled to regain momentum after ending three years of severe coronavirus pandemic restrictions earlier this year.

The bleak trade numbers reinforced expectations that China’s sluggish economic activity would slow further in the third quarter, increasing pressure on policymakers to enact new stimulus measures.

“While the export numbers square with slowing overseas demand, the weak imports data is the latest piece of evidence that more stimulus is urgently needed to boost domestic confidence and spending,” according to analysts at UBS.

The renminbi fell 0.3 per cent to trade at Rmb7.2208 a dollar, its weakest level since mid-July.

Attention is now turning to China’s inflation figures, due out on Wednesday, with expectations of deflation of 0.4 per cent in July after prices were stagnant in the previous month.