US STOCKS-Dow, S&P 500 drop as bank stocks slump

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* FedEx jumps as profit soars on pandemic-fueled demand

* Banks drop as Fed to let leverage exemption expire

* Nike falls as sales miss estimates

* Indexes: Dow down 0.9%, S&P dips 0.4%, Nasdaq up 0.1% (Updates to market open)

March 19 (Reuters) – U.S. stocks tumbled on Friday, with banks leading the way after the U.S. Federal Reserve let expire a temporary capital buffer relief put in place to ease a pandemic-driven stress in the funding market.

The S&P 500 bank stocks shed about 3% as the Fed’s move means banks will have to resume holding an extra layer of loss-absorbing capital against U.S. Treasuries and central bank deposits from next month.

“Banks have had such a significant up move this year and this news has only acted as a catalyst for profit taking,” said Art Hogan, chief market strategist at National Securities in New York.

“It’s quadruple witching day, all bets are off so it’s difficult to say if the Fed decision has had an impact .. It’s one of those days when we see a great deal of volume and volatility and we might see things change back on Monday.”

Market trading volumes and liquidity are expected to rise on Friday due to “quadruple witching,” the quarterly simultaneous expiration of U.S. options and futures contracts.

Nike Inc’s 4% drop was the biggest drag on the Dow after the company missed quarterly sales estimates due to shipping issues and a pandemic-related slump at brick-and-mortar stores.

Yield on U.S. 10-year notes, which has risen sharply in the past seven weeks on growth expectations, hovered near a 14-month peak at $1.742%. US/]

Optimism over a $1.9 trillion fiscal package and the Federal Reserve’s promise to maintain its ultra-loose policy stance for years has accelerated a shift into economy-linked stocks, powering the S&P 500 and the Dow to record levels this week.

However, the Nasdaq is still about 7% below its Feb. 12 all-time closing high as technology and high-growth stocks have lost favor, with their valuations looking expensive with a jump in yields.

The three major indexes fell sharply in the final hours of trading on Thursday, with the Nasdaq shedding about 3% on concerns about a month-long lockdown in Paris.

Several bond managers believe the recent pace of the rise in yields has been unsettling and also worry the market could be viewed as disorderly if the momentum continues.

At 9:55 a.m. ET the Dow Jones Industrial Average fell 281.32 points, or 0.86%, to 32,580.98, the S&P 500 lost 15.09 points, or 0.39%, to 3,900.37 and the Nasdaq Composite gained 14.89 points, or 0.11%, to 13,131.06.

FedEx Corp jumped 4.2% after the U.S. delivery firm said quarterly profit jumped more than expected on higher prices and surging volume from pandemic-fueled e-commerce deliveries during the holiday shipping season.

Declining issues outnumbered advancers by a 1.9-to-1 ratio on the NYSE and by a 1.2-to-1 ratio on the Nasdaq.

The S&P 500 posted 3 new 52-week highs and no new low, while the Nasdaq recorded 30 new highs and 26 new lows. (Reporting by Shashank Nayar and Medha Singh in Bengaluru; Editing by Maju Samuel)