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Wall Street Opens Lower, Reversing After Fed Ends Bank Loophole; Dow Down 260 Pts

Published 03/19/2021, 09:41 AM
Updated 03/19/2021, 09:47 AM
© Reuters.

© Reuters.

By Geoffrey Smith 

Investing.com -- U.S. stock markets headed lower for a second straight day on Friday, reversing overnight gains after the Federal Reserve said it would close a potentially significant loophole in banking regulation. 

The Fed said that from March 31, banks will again have to count their Treasury bond and cash holdings towards their Supplementary Leverage Ratio. It had exempted such holdings in the first wave of the pandemic to allow the financial system to absorb a massive injection of liquidity as it slashed interest rates and started buying bonds in huge volume.

By 9:45 AM ET (1345 GMT), the Dow Jones Industrial Average was down 267 points, or 0.8%, at 32,595 points. The S&P 500 was down 0.6% while the Nasdaq Composite was outperforming with a drop of only 0.2%. 

Some – but not all – analysts have argued that the ending of this exemption will reduce banks'  willingness to hold Treasuries in a year when federal government borrowing is set to skyrocket. If that thesis is proved, it would put significant upward pressure on bond yields, which are already rising amid fears of a return of inflation. 

The yield on the 10-year Treasury note rose to an intraday high of 1.74% in response to the news. 

However, the Fed indicated that it would take action to mitigate any mechanistic pass-through into yields that could choke off an economic recovery.

"Because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability," the central bank said in its statement.

Bank stocks were among those hardest hit by the news. JPMorgan (NYSE:JPM) stock fell 3.0%, while Bank of America (NYSE:BAC) stock fell 3.1%. Higher effective capital requirements would mean, at least on paper, that banks won't have as much money for share buybacks and dividends. Wells Fargo (NYSE:WFC) stock lost 2.6% and Citigroup (NYSE:C) stock lost 1.8%.

Elsewhere, Nike (NYSE:NKE) stock fell 5.0% after the company warned that supply chain bottlenecks, including port congestion and a lack of available shipping containers had weighed on sales in the quarter through February and would continue to do so for the time being.  FedEx (NYSE:FDX) stock rose 5.6%, after its quarterly results suggested it would be able to pass on the costs of such bottlenecks to its customers. 

Tesla (NASDAQ:TSLA) stock fell 4.0% after reports that China will stop state and military personnel from using them owing to fears that the data they collect could leak information related to state security.  The news came after a day of bruising exchanges between Chinese and U.S. diplomats at their first face-to-face meeting since President Joe Biden took office. The talks continue on Friday in Alaska.

Latest comments

Great job Fed bank.
These institutions are going to force me to cash out for next years writeoff arent they
Another loss flagrantly whisked out of the system via the same pattern.  How much of the loss will vanish today in the US Ponzi Scheme, greatest investment fraud in history, and biggest investment joke in the world?
Read the FT article today on SLR.. it’s a complete other issue from what the mainstream media is saying.. BTW it’s impact on treasuries is a lot more uncertain then it seems
Looks like the rich got info from fed / insider trading since bonds ran up so fast a few days before this news.
This push yeilds up more since banks will be hesitate to buy gov bonds. But if banks hold to much treasuries n went belly up, it creates chaos.
Less liquidity and higher taxes ahead, the market is learning it's not always Xmas
would love to pay a million tax per month. it all changes with the way you look at it
The problem is that Goverment is the worst manager of money
Good and fine
with me
What a good market start. Hope dow and s&p drop more. We want a black friday!
good decision by fed...it is not feds job to protect stock market...
this has nothing to do with the stock market lmao we are talking about bonds here...
 bond yields are impacting stock market direction:)
 there is a very direct inverse correlation between the stock market and bond yields - wakey wakey!!!! If the FED buys bonds, they can control the yield curve and keep yields in check - by doing so they can prevent to some degree interest rates (the cost of borrowing) from going up - that is essential for the thousands of US companies on the stock exchange that are heavily in debt and only surviving because interest rates are super low - if those yields keep rising, then businesses have to pay more for the vast amounts of borrowings they have - many will then go to the wall - see what happens to the stock market prices then!
Which means bond yield rise could be tamed ?
of course..fed dont worry about it too much but markets could not read fed correctly...or some bond manipulators behind that bond sell off and we dont know..but this decision shows that fed aint worried for temporary increase in bond yields and see it healthy...
Hey Geoffrey, the SLR exemption is not a "loophole"
This is a clear mistake from FED that will almost sure affect negatively the stock market
Okay, this only means you gwt cheaper prices to buy more shares of equities.
heaven forbid the stock market is negatively affected! omg! just wait mate. the shows just getting started
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