Stocks Slide on Weak Oil, Troubled Banking Sector

Stocks lurched lower Tuesday as volatile oil prices, a fresh drop in European bank shares and a lackluster trading session in Asia kept major indexes depressed.

The Dow Jones Industrial Average slipped 37 points, or 0.2%, to 18368 shortly after the opening bell. The S&P 500 dropped 0.2%, and the Nasdaq Composite fell 0.4%.

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U.S. oil prices entered a bear market Monday, and crude continued to hover around $40 a barrel early Tuesday, weighing on broader markets.

The growing global supply of crude could drag prices back down to around $35 a barrel in the near-term, analysts said, renewing pain for the energy sector and its lenders. U.S. oil rose 1.7% to $40.74 a barrel.

Later this week, the Labor Department will report nonfarm payrolls for July. Investors will be watching for any changes that could move the needle on the Fed’s next interest rate rise.

Fed-fund futures, used by investors to bet on central bank action, suggest an imminent rate rise is unlikely. The probability of a rate rise in September stands at just 15%, according to data from CME Group.

“Since the bull market began, it’s been based on liquidity injected by central banks—it’s not been earnings-driven,” said Bruce Bittles, chief investment strategist at Robert W. Baird & Co.

The two main risks in the market now, he said, are that interest rates begin to rise, or the U.S. economy slumps toward recession levels.

In currencies, the dollar was weaker against the yen, euro, sterling and Australian dollar. The euro was up 0.3% at $1.1194, after rising to its best level since the U.K. referendum.

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The weaker dollar helped lift commodity prices, as gold climbed to a three-week high and last traded at $1,367 an ounce.

Elsewhere, the Stoxx Europe 600 fell 0.8% as European banks deepened declines in the aftermath of Friday’s stress-test results.

Investors’ concerns have mounted over the health of Italian banks, the potential need for more capital raising and a general lack of profitability in lenders across the region.

“Whether it’s Italy, Spain or Portugal, that nonperforming [loan] issue just filters across the European banking sector,” said Dean Enyon, equity market maker at Peel Hunt, noting recent downbeat forecasts from lenders and close calls on the stress tests have exacerbated concerns about the sector.

Shares of Italian bank UniCredit SpA were suspended from trading Tuesday after dropping 5%, while Germany’s Commerzbank AG became the latest lender in the regionto warn on profit as negative interest rates took their toll. Shares fell 8.7%.

As a result of declining market capitalization, Stoxx Ltd. announced late Monday thatCredit Suisse Group AG and Deutsche Bank AG would be deleted from the Stoxx Europe 50 Index, effective Aug. 8. Shares of Credit Suisse dropped 5.8%, while shares of Deutsche Bank declined 4%, bringing year-to-date losses for both banks to around 49%.

Earlier, stocks in Japan fell 1.6% as investors waited for the details of a new stimulus plan.

Prime Minister Shinzo Abe’s cabinet approved a ¥28 trillion ($274 billion) stimulus packageTuesday morning. It was among the country’s biggest since the global financial crisis, but three quarters of the stated value comprises targeted low-interest loans from the government and state-owned companies.

The dollar was last down 0.8% against the yen at ¥101.5910, while the yield on the 10-year Japanese government bond hit as high as minus 0.11%, before declining. Yields move inversely to prices.

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Shares in Australia fell 0.8% after its central bank cut interest rates to a record low, as widely expected.

The Shanghai Composite Index rose 0.6%, while trading in Hong Kong was suspended due to a typhoon.

 

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