The US stock market suffered on Tuesday after ratings agency Moody’s cut the credit rating of a host of US banks, placing some large lenders on watch.
SPX500 – Daily Chart
The SPX500 had an early wobble and traded at weekly lows, but the index has managed to recover and hold onto support. There is still potential for the SPX to push for the July highs.
Ratings agency Moody’s cut the credit ratings of some small and mid-sized US banks on Monday and placed some of the larger Wall Street names on review. The company reduced the rating of ten banks by one notch, while Bank of New York Mellon, US Bancorp, and State Street were among the large lenders under review.
“US banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets,” Moody’s analysts Jill Cetina and Ana Arsov said.
“Meanwhile, many banks’ Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital. This comes as a mild US recession is on the horizon for early 2024 and asset quality looks set to decline from solid but unsustainable levels, with particular risks in some banks’ commercial real estate (CRE) portfolios.”
The move is the first significant bout of downgrades since the regional banking crisis in March following the collapse of Silicon Valley Bank.
The Federal Reserve lifted its benchmark interest rate again to a 5.25%-5.5% range after raising rates aggressively over the last year and a half.
“We expect banks’ ALM risks to be exacerbated by the significant increase in the Federal Reserve’s policy rate as well as the ongoing reduction in banking system reserves at the Fed and, relatedly, deposits because of ongoing QT,” Moody’s added.
