Banks lead US stocks lower after Fed caps dividends; Dow, S&P fall over 2%

While the S&P 500 fell 2.15% in early trading on Friday, Dow Jones declined 2.7% and Nasdaq slipped 2.3%

Stocks opened lower on Wall Street, led by declines in banks after the Federal Reserve told them they had to cap their dividends and halt stock buybacks in order to shore up their defenses in case the recession gets worse.

While the S&P 500 fell 2.15 per cent in early trading on Friday, Dow Jones declined 2.7 per cent and Nasdaq slipped 2.3 per cent (until 12 am IST). The Nike stock fell over 6 per cent after reporting a big loss as most of its stores were forced to close.

Investors were disappointed to see that the number of confirmed new coronavirus cases per day in the US hit an all-time high of 40,000, surpassing the peak set during one of the deadliest stretches in late April.

In Europe, too, most major indices ended in the red. The exception was London's FTSE 100, which ended slightly up. In Asia and Australia, while Tokyo, Seoul, and Sydney rose, Hong Kong declined. 

In the previous session, banks stocks had powered Wall Street's main indexes higher, helping them offset investor fears due to rising virus infections in several US states, including Texas, Oregon and Utah.

“States are rethinking the reopening and that’s going to affect a lot of businesses,” said David Yepez, lead equity analyst and portfolio manager at Exencial Wealth Advisors in Oklahoma. “We’re not going to test those March lows but there could be a correction, because we got a little bit too high.” 

Stephen Innes of AxiTrader said:  “Investors are finding it hard to see the marginal or incremental new support,” said Innes. “Investors may need more prominent catalysts. Ideally a vaccine.”

Analysts say investors are looking ahead to a possible rebound from the deepest global downturn since the 1930s and trying to buy companies that will thrive after the pandemic ends. But they warn the market rise might be too fast and too early to be sustained by an uncertain economic outlook.

China and other governments are due to report June trade, factory output and other indicators starting next week.

“With second Covid-19 waves spreading in some countries and first-wave outbreaks not yet over in others, the economic slump has a long way to go,” said Prakash Sakpal of ING in a report.

The US economy shrank by 5 per cent in the first quarter of the year, the Commerce Department reported on Thursday. Forecasters expect a worse decline during the quarter that ends next week.

Investors in the United States have been encouraged by official moves to lift anti-virus measures and allow businesses to reopen. But some states have reimposed curbs after a resurgence in new reported infections.

Hospitalisations and reported cases have hit new highs in California, Florida and Texas, which is suspending its aggressive reopening. The daily number of confirmed cases in the country closed in on the peak reached in late April.