Concerns over US bank ratings and weak Chinese data

The downward correction in the stock markets continues. Yesterday, the sentiment was worsened by the Fitch agency, which issued a warning for the rating of large US banks. Added to this were hawkish comments from the Fed. Concerns about global economic growth were fueled by worse than expected data from China.

Banks' rating at risk

One of Fitch's analysts directly warned that the US banking sector is close to another turmoil. This is a potential opportunity lowering the credit rating of large banks, among which is JPMorgan Chase. The rating of the entire sector was downgraded already in June, now it may apply to specific entities. Let us remind you that last week Moody's reduced the rating of 10 small and medium-sized banks and issued a warning that the cuts may apply to larger institutions in the future. Recently, the Fitch agency also downgraded the long-term credit rating of the US, which was argued, among others, by high level of national debt.

The moods were not helped by the data from the US economy, specifically the data on retail sales, which turned out to be above market expectations. The NY Empire State index was a negative surprise as it was surprisingly low (-19 points).

The chance for further hikes by the Fed was increased by yesterday's words of Neel Kashkari, who openly said that despite the decline, inflation is still too high. His words suggest that the Fed is able to do even more, which should be interpreted that the cost of money in the US has a chance for another increase.

Weakening growth dynamics in China

Chinese publications fit into this pessimistic mood. Disappointing data on economic activity in July, inflation below zero and again concerns about the real estate sector and the shadow banking sector require policy makers to act quickly. Monthly data showed that the growth dynamics weakened further. Industrial production growth slowed to 3,7%. y/y 4,4 percent in June and compared to 5,7 percent. growth before the pandemic. Retail sales growth fell to just 2,5 percent. y/y 3,1 percent in June.

Weak July activity figures add to a string of disappointing data and news, including CPI inflation below zero, weak trade and credit growth, rising risk of insolvency of a major developer and non-payment of high-yield investment products by one of China's largest private wealth managers. Regarding this last point, private wealth management companies and trust companies are key players in the Chinese system "shadow banking system"which provides developers with financing.

Before consumer and business confidence plummets, policy makers must act quickly. The central bank of China has once again lowered its one-year medium-term lending rate (MLF) by 15 bps to 2,5 percent.

Source: Łukasz Zembik, OANDA TMS Brokers