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Inside Markets — Banks


August 16, 2023

Financials declined ~1.9% yesterday as Fitch warned about potential debt rating downgrades for large US banks. For context, S&P downgraded US sovereign debt on August 5, 2011, and then announced the downgrade of 15 banks on November 29, 2011.  The actual downgrade was a non-event, but the Financials SPDR ETF (XLF) declined -19.5% from August 5 -October 3, 2011 before staging a ~44% rally through March 2012. We doubt the move will be as large this time around, but look for the XLF to bottom prior to any large cap bank credit downgrade.  

Yesterday’s July retail sales beat reduced near-term recession concerns but increased the probability for a November rate hike to ~30%.  Consensus still expects that the Fed is done with its hiking cycle, but the view is highly dependent on upcoming data including the September 1 Jobs Report and September 13 CPI print.

US equities are always highly sensitive to interest rates and bond yields, with a potential release in 10-year yields above ~4.20% likely to put near-term downside pressure on the index.  A sustained close above ~4.20% should pressure the SPX to key support at 4405. A break below 4405 opens the door for a test of the bullish inflection at ~4200.  Failure for 10-year yields to close above ~4.20% would likely generate another decent rally in the SPX given that many stocks have already returned to oversold levels.

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