Wall St futures slip as Moody's downgrades bank stocks

[August 08, 2023]  By Bansari Mayur Kamdar and Johann M Cherian

(Reuters) -U.S. stock index futures fell on Tuesday, with financial stocks edging lower after Moody's overnight cut credit ratings of several small- to mid-sized U.S. banks and said it could downgrade some of the country's biggest lenders.

Moody's cut the ratings of 10 lenders by one notch and placed six banking giants, including Bank of New York Mellon, US Bancorp, State Street and Truist Financial, on review for potential downgrades.

The ratings agency also warned that the sector's credit strength would likely be tested by funding risks and weaker profitability.

Big banks Goldman Sachs and Bank of America eased 0.8% and 1.4%, respectively, in premarket trading, while Bank of New York Mellon and U.S. Bancorp shed 2.3% each.

"Moody's putting some banks on warning adds to Fitch's downgrade of the U.S. Treasury market last week and gives investors additional reason to be cautious," said Sam Stovall, chief investment strategist at CFRA Research.

"It also means that the concern that we had in March over those three bank defaults, is not over yet."

The banking index has lost 1.4% so far this year, compared with a 17.7% rise in the benchmark S&P 500 index, after the collapse of Silicon Valley Bank and Signature Bank earlier this year sparked a crisis of confidence in U.S. lenders and led to a run on deposits at several regional banks.

"Orderly position trimming has reduced some of the short-term positioning risk that has been a worry for investors in recent weeks," said Citi strategist Chris Montagu in a note, referring to last week's losses.

"This puts markets in a good set-up to make new gains or weather negative news/shocks in the coming weeks."

After S&P 500 and Nasdaq logged their worst week since March, Wall Street rallied on Monday as investors built positions ahead of Thursday's highly awaited U.S. inflation report.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 19, 2023. REUTERS/Brendan McDermid/File Photo

At 6:52 a.m. ET, Dow e-minis were down 195 points, or 0.55%, S&P 500 e-minis were down 24.5 points, or 0.54%, and Nasdaq 100 e-minis were down 81 points, or 0.52%.

U.S. inflation likely accelerated slightly in July to an annual 3.3%, while the core rate was likely unchanged at 4.8%, according to a Reuters poll of economists.

Remarks by Philadelphia Fed President Harker and Richmond Fed President Barkin will be closely watched for cues about the U.S. central bank's rate path after mixed messages from New York Fed President John Williams and Fed Governor Michelle Bowman on Monday.

United Parcel Service dropped 6.1% in trading before the bell after the U.S. economy bellwether cut its annual revenue forecast, hurt by softening e-commerce demand.

Eli Lilly surged 10.1% after the drugmaker beat estimates for quarterly profit, buoyed by strong demand for its new diabetes drugs Mounjaro.

Tesla fell 1.3%, extending losses from the previous session after finance chief Zachary Kirkhorn stepped down, surprising analysts who saw the company veteran as a possible successor to CEO Elon Musk.

U.S.-listed shares of Chinese companies Alibaba Group Holding and Bilibili fell between 2.1% and 3.4%, tracking their domestic counterparts after disappointing trade data from the world's second largest economy.

(Reporting by Bansari Mayur Kamdar and Johann M Cherian in Bengaluru; Editing by Sriraj Kalluvila)

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