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Stock Market Slumps Amid Global Economic Concerns and Banking Sector Weakness

August 16, 2023

Stock markets experienced a significant decline on Tuesday, driven by mounting apprehensions about the global economy, particularly China, and a downturn in the U.S. banking sector. The Dow Jones Industrial Average dropped by 361.24 points, or 1.02%, closing at 34,946.39, ending its three-day positive streak. The S&P 500 retreated by 1.16%, closing at 4,437.86, slipping below its 50-day moving average, which could signal the initiation of a potential downtrend. The Nasdaq Composite also recorded a 1.14% fall, concluding the day at 13,631.05.

In the U.S., financial stocks saw a notable weakening. JPMorgan Chase and Wells Fargo shares both declined by 2%, while Bank of America shares dropped by 3%. This decline followed a warning from Fitch that it might downgrade the credit rating of numerous banks, including JPMorgan Chase. Just the previous week, Moody’s had already downgraded the ratings of ten U.S. banks and placed several major institutions on a watchlist for potential downgrades. Regional banks faced a similar fate, with the SPDR S&P Regional Banking ETF (KBE) experiencing a 3% decline. This decrease came after Minneapolis Federal Reserve President Neel Kashkari advocated for more stringent capital regulation.

Global investor sentiment was further impacted by discouraging economic data from China, combined with an unexpected interest rate cut by its central bank. China reported a mere 3.7% increase in industrial production in July compared to the previous year, falling short of expectations. Retail sales growth was also underwhelming, prompting the People’s Bank of China to reduce interest rates by 15 basis points to 2.5%. However, this move failed to allay concerns and instead intensified worries about China’s ailing real estate market. Market experts suggested that skepticism was growing about the effectiveness of Chinese government stimulus measures, contributing to the overall market unease.

The stock market’s turbulence coincided with a week marked by prominent earnings reports from major retailers. Home Depot exceeded analyst expectations, reporting higher earnings per share and revenue, which provided a slight boost to its stock. The week ahead also promised releases from Target and Walmart, further shaping investor sentiment. On the data front, July’s U.S. retail sales figures surprised economists, with a 0.7% month-over-month increase, surpassing the estimated 0.4% rise. These developments highlighted a robust consumer outlook amidst the broader economic uncertainties.

Data by Bloomberg

On Tuesday, the stock market witnessed widespread declines across all sectors, with a notable decrease of 1.16%. Among the sectors, Energy suffered the most significant drop, plummeting by 2.44%, while Financials and Utilities also experienced substantial declines of 1.80% and 1.69%, respectively. Consumer Discretionary and Materials sectors faced losses of 1.37% and 1.65%, highlighting a challenging day for these segments. Industrials and Real Estate both slid by 1.27% and 1.07%, respectively. Communication Services and Consumer Staples followed suit with decreases of 1.01% and 1.02%. Information Technology encountered a decline of 0.91%, while Health Care demonstrated relatively milder losses of 0.36%.

Major Pair Movement

The US Dollar Index extended its strength, marking a fourth successive daily gain and reaching a one-month peak on Tuesday. This recovery was driven by increased risk aversion and a rebound in Treasury yields. Wall Street stocks faced over a 1% decline, while US 10-year Treasury yields initially dropped but later rebounded above 4.20%. Meanwhile, the US Retail Sales surpassed expectations by rising 0.7% in July, exceeding the projected 0.2%. However, the NY Empire Manufacturing Index decreased to -19 from -1. Upcoming economic indicators include Building Permits, Housing Starts, and Industrial Production, with particular attention on the forthcoming FOMC meeting minutes.

EUR/USD initially rose to 1.0950 before retreating to 1.0900, influenced by a resurgent US Dollar. Eurozone data on GDP, Employment, and Industrial Production will be unveiled on Wednesday. In the UK, robust wage data fueled expectations of a Bank of England (BoE) rate hike, boosting the Pound. GBP/USD steadily advanced, closing above 1.2700. The UK’s upcoming Consumer Price Index (CPI) inflation report for July will be closely monitored, with an anticipated decline from 7.9% to 6.7%.

USD/JPY remained stable around 145.50, testing support near 146.00 but finding strength above 145.00. Canada witnessed a rebound in its Consumer Price Index to 3.3% in July, surpassing the expected 3%, briefly lifting the Canadian Dollar. USD/CAD sustained its upward trend, closing just below 1.3500.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Retreats from Peak as US Dollar Stays Resilient Amid Economic Reports

The EUR/USD currency pair experienced a brief peak at 1.0951 on Tuesday, only to retract to 1.0900, highlighting ongoing seller influence and erasing daily gains. The US Dollar retains its robustness following favorable economic data. Eurozone data presented a mixed picture, with the German ZEW Expectation Index surpassing predictions at -12.3, while the Current Situation Index fell to -71.3, worse than expected. Eurozone Q2 growth, employment data, and June’s industrial production are awaited. In the US, retail sales exceeded forecasts, rising 0.7% in July, despite a lower-than-expected NY Empire State Manufacturing Index for August. The Dollar initially rose post-data but later dipped before rebounding, driven by risk aversion and US yield recovery. Wednesday brings building permits, industrial production figures, and Federal Reserve meeting minutes.

Chart EURUSD by TradingView

Based on technical analysis, the EUR/USD moves flat on Tuesday, creating a flat move in the bands of the Bollinger Bands. Currently, the price is moving between the middle and the lower of the Bollinger Bands. The Relative Strength Index (RSI) presently stands at 40, signifying that the EUR/USD is currently in a consolidation phase with a slight bearish undertone.

Resistance: 1.0935, 1.1038

Support: 1.0874, 1.0789

XAU/USD (4 Hours)

XAU/USD Hits 3-Month Low at $1,896.33 Amid Risk-Averse Markets and Mixed Data

On Tuesday, the XAU/USD pair fell to its lowest point since June at $1,896.33 per troy ounce, currently hovering around $1,906. While demand for the US Dollar has eased with Wall Street’s opening, overall market sentiment remains risk-averse, benefiting the Greenback. Weaker-than-expected Chinese data earlier in the day dampened investor confidence, raising concerns of a global growth slowdown driven by the Asian economic giant.

Positive data emerged from the United States, with July’s Retail Sales exceeding expectations at a 0.7% rise, surpassing the projected 0.4%. The Retail Sales Control Group saw an even more substantial increase of 1%, doubling the previous figure. Although this positive news halted the decline in stocks, Wall Street remained in negative territory, albeit improved from pre-opening levels.

Meanwhile, government bond yields retreated from recent multi-month highs, putting downward pressure on the US Dollar throughout the latter half of the day. The decline in yields was prompted by a warning from Fitch Ratings analysts, suggesting potential downgrades for certain American banks.

Chart XAUUSD by TradingView

Based on technical analysis, the XAU/USD witnessed a slight decrease on Tuesday, the price managed to reach the lower band of the Bollinger Bands during this movement. At present, the price is retracing higher. The Relative Strength Index (RSI) is currently at 37, indicating that the XAU/USD pair is exhibiting a somewhat bearish sentiment.

Resistance: $1,912, $1,923

Support: $1,902, $1,892

Economic Data

CurrencyDataTime (GMT + 8)Forecast
NZDOfficial Cash Rate10:005.50% (Actual)
NZDRBNZ Press Conference11:000.9%
GBPCPI y/y14:006.7%