Wall Street slumps with markets worldwide on worries about banks and economy

Stocks are slumping on Tuesday as more caution creeps into financial markets worldwide. The S&P 500 was 1 percent lower in early trading, following up on losses for stocks across Europe and much of Asia. The Dow Jones Industrial Average was down 370 points, or 1 per cent, at 35,102, as of 9:50 am Eastern time, and the Nasdaq composite was 1.3 per cent lower.

In the US, bank stocks dropped after Moody's cut the credit ratings for several smaller and midsized ones amid a long list of concerns about their financial strength. Across the Pacific, stocks sank 1.8 per cent in Hong Kong and 0.3 per cent in Shanghai after a report showed exports for China's troubled economy shrank by the most since the start of the pandemic in 2020.

The worries layered on top of a mixed set of earnings reports from big US companies.

UPS fell 3 per cent after it cut its forecast for revenue this year. It reported stronger profit for the spring but weaker revenue.

Eli Lilly helped to limit the market's losses after jumping 16.4 per cent. The medicine developer reported profit and revenue for the spring that both topped analysts' expectations.

More jolts may be ahead for markets. The US government later in the morning will report how many job opening were available across the country in June, a test of how resilient the job market remains. Economists expect a separate report to show US manufacturing continues to struggle under the weight of much higher interest rates.

The Federal Reserve has hiked its main interest rate to the highest level in more than two decades in hopes of grinding down inflation. High rates work by slowing the entire economy bluntly, which has raised the risk of a recession but also helped inflation to moderate since its peak last summer.

Besides manufacturing, high rates have hit banks particularly hard. Moody's said the rapid rise in rates has led to conditions that hurt profits for the broad industry, while knocking down the value of investments made when rates were super low. Such conditions helped cause three high-profile failures for three US banks earlier in the spring, which shook confidence in the system.

Moody's also said troubles may be coming for banks with lots of commercial real estate loans, which are hurting as the threat of a US recession remains and work-from-home trends keep people out of offices.

M and T Bank, one of the banks whose credit rating Moody's downgraded, fell 4.7 per cent. Truist Financial, one of the banks that Moody's said it's reviewing for a possible downgrade, fell 4.5 per cent.

Other, larger banks whose credit ratings weren't affected also sank. JPMorgan Chase fell 2 per cent and was one of the heavier weights on the S and P 500.

Later this week, the US government will releases data on consumer and wholesale inflation, which could influence what the Federal Reserve does next with interest rates.

The hope on Wall Street is that the cooldown in inflation since its peak above 9 per cent last summer will help persuade the Fed that upward pressure on prices is under control and no more rate hikes are needed. Forecasters expect Thursday's data to show consumer prices rose by 3.3 per cent in July over a year ago, an acceleration from June's 3 per cent.

But some economists and investors say getting that list bit of inflation moderation to the Fed's target of 2 per cent is likely to be the most difficult. They're saying Wall Street has become convinced too quickly that the Fed can achieve a "soft landing" for the economy and that the 19.5 per cent run for the S and P 500 through the first seven months of this year was overdone.

In the bond market, Treasury yields tumbled as investors moved into investments considered safer.

The yield on the 10-year Treasury fell to 3.98 per cent from 4.10 per cent late Monday. It helps set rates for mortgages and other loans.

The two-year Treasury yield, which more closely tracks expectations for the Fed, fell to 4.73 per cent from 4.79 per cent.