Wall St drops as bank rating downgrades trigger wider sell-off

By David French and Bansari Mayur Kamdar

(Reuters) – Wall Street dropped on Tuesday as downgrades of several lenders by credit rating agency Moody’s (NYSE:) reignited fears about the health of the U.S. banking sector, sparking a wider sell-off.

The agency cut ratings on 10 small- to mid-sized lenders by one notch and placed six banking giants, including Bank of New York Mellon (NYSE:), U.S. Bancorp, State Street (NYSE:) and Truist Financial (NYSE:), on review for potential downgrades.

Moody’s also warned that the sector’s credit strength would likely be tested by funding risks and weaker profitability.

Market confidence in U.S. banks has been gradually increasing after the failures of three lenders earlier this year, including Silicon Valley Bank, shocked the financial system.

The downgrades showed the fragility of investors’ confidence. The S&P 500 Banks index has lost 3.1% so far this year, compared with a 16.8% rise in the benchmark .

The banks index slid 1.8% on Tuesday, while the KBW Regional Banking index dropped 2%.

Big banks Goldman Sachs (NYSE:) and Bank of America (NYSE:) eased 3.1% and 2.6%, respectively, while Bank of New York Mellon and U.S. Bancorp shed 1.9% and 0.4%.

“Anytime you see the backbone of the U.S. financial system being under watch, that gives people a lot to pause,” said Brandon Pizzurro, director of public investments at Guidestone Capital Management.

“Markets are slowly digesting that, maybe the U.S. financial system is not absolutely perfect and maybe we are going to have higher rates for a much longer period of time.”

Reaction to the bank downgrades pushed the CBOE Market Volatility index, Wall Street’s fear gauge, to a two-month high.

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

Calming some jitters over further monetary tightening, Philadelphia Fed President Patrick Harker said barring any abrupt change in the direction of recent economic data, the U.S. Federal Reserve could be at a stage where it could leave interest rates unchanged.

At 2.10 p.m. ET, the fell 267.12 points, or 0.75%, to 35,206.01; the S&P 500 lost 35.84 points, or 0.79%, at 4,482.6; and the dropped 157.90 points, or 1.13%, to 13,836.50.

Ten of the 11 major S&P 500 sectors fell. While financials was, understandably, one of the biggest decliners, materials and technology also weighed heavily.

The energy index was among the worst performers in early trading, as crude prices fell after disappointing trade data from top-consumer China. However, as oil turned positive into the afternoon, aided by a U.S. government agency projecting a rosier outlook on the economy, this helped erase some of the decline. [O/R]

Healthcare bucked the trend with a 0.3% gain.

Drugmakers globally rose after Denmark-based Novo Nordisk (NYSE:) said its obesity drug, Wegovy, reduced the risk of heart disease.

Eli Lilly (NYSE:) surged 13.3% to hit a record high after the pharmaceutical firm posted upbeat quarterly profits.

Dish Network (NASDAQ:) jumped 9.3% as the pay-TV provider disclosed plans to merge with satellite communications vendor EchoStar, which rose 1.2%.

United Parcel Service (NYSE:) lost 1% after the U.S. economy bellwether cut its annual revenue forecast.