European SWOT Market
Fundamental Analysis

Equities Tumble Amid Surprising Retail Sales Increase

  • Major US banks faced declines due to a report indicating potential downgrades by Fitch.
  • US retail sales surpassed predictions in July.
  • Beijing’s policy measures failed to improve investor confidence.

US equities ended the day lower on Tuesday, experiencing a significant decrease in value. This drop came after retail sales data exceeded expectations, causing concerns about the possibility of higher interest rates lingering. 

At the same time, major US banks faced declines due to a report indicating potential downgrades by Fitch for certain lenders.

US retail sales (Source: US Commerce Department)

US retail sales (Source: US Commerce Department)

In July, US retail sales surpassed predictions, propelled by increased online shopping and higher restaurant spending. This suggested that the economy continued its expansion in the early third quarter, effectively preventing a recession. 

The report from the Commerce Department disclosed a 0.7% growth in retail sales last month, surpassing the expected 0.4% rise. This outcome underscored the enduring strength of the US economy. 

The report revealed additional insights, revealing robust consumer spending on hobbies, sporting goods, and clothing. This resilience persisted despite the Federal Reserve’s aggressive interest rate hikes to curb inflation.

Following this data release, traders placed an 89% likelihood of the Federal Reserve halting rate hikes next month. However, analysts noted concerns among investors about the potential for interest rates to remain at current levels for longer than anticipated.

Investor apprehension regarding interest rates also impacted banks, causing them to bear the brunt of the market sell-off. The US Treasury yield curve has been inverted for over a year, meaning that longer-term bonds yield less than short-term debt instruments. This created pressure on banks’ profits derived from loans. 

Meanwhile, a report suggested that Fitch, a rating agency, could downgrade multiple banks. Consequently, shares of JPMorgan Chase, Bank of America, and Wells Fargo suffered declines of 2.5%, 3.2%, and 2.3%, respectively. Furthermore, the S&P 500 banking index reached its lowest point in a month, plummeting by 2.75%.

On Tuesday, European equities declined, with UK and Swedish stocks taking the lead. This was prompted by concerning data from both countries that raised fears about elevated interest rates. Concurrently, shares tied to China faced a drop as Beijing’s policy measures failed to improve investor confidence.

The situation in the UK was influenced by a surge in British government bond yields. This occurred following the release of data indicating a remarkable growth rate in domestic basic wages. As a result, the likelihood of further rate hikes by the Bank of England increased.