U.S. equities finished with sizeable losses after the post-Federal Reserve gains from last week — spurred by the as-expected “no hike” decision — were washed away.
In the end, the Dow Jones Industrial Average lost 0.9%, the S&P 500 Index dropped 0.9%, the Nasdaq Composite wafted 0.9% lower and the Russell 2000 ended the day 1.1% lower. Treasury bonds moved higher, the dollar was weaker, gold gained a touch and crude oil surged on another round of OPEC supply freeze/cut rumors adding 3.3%.
Defensive utility stocks led the way by limiting their decline to 0.2%. Financials were the underperformers, down 1.5%. Array BioPharma Inc (NASDAQ:ARRY) surged 81.9% after announcing solid phase 3 study data for a new treatment for melanoma patients. Twitter Inc (NYSE:TWTR) gained 3.6% after Bloomberg reported Walt Disney Co (NYSE:DIS) is working with an advisor on a potential bid for the company. CNBC reported that Microsoft Corporation (NASDAQ:MSFT) is also a potential suitor.
Some of the broad market weakness, no doubt, is apprehension over the Trump versus Hillary presidential debate smack down now just mere hours away, with big-time policy implications for the future of the market and the economy as the polls suggest the race is now a dead heat.
Fresh polling from FiveThirtyEight showed Trump pulling ahead earlier in the day (at 55% chance of winning according to their “Now-cast” prediction, which has since been revised lower) at a time when many believe Wall Street hasn’t adequately priced-in the potential for a Trump Administration.
Analysts from banks including Societe Generale and Morgan Stanley, among others, are recommending clients consider safe haven positions in assets like gold and volatility to insulate themselves from a market response to something that can no longer simply be dismissed as a super unlikely “tail risk” event.
But a bigger catalyst has been the reappearance of big-time regulatory risk for big bank stocks at a time when the sector has already been hit on concerns over profit margins and a possible hit to long-term government bonds related to Bank of Japan plans to lift long-term interest rates.
Deutsche Bank AG (USA) (NYSE:DB) was slammed 7.1% out of its three-month post-Brexit consolidation range on Monday after German Chancellor Angela Merkel was reported to have ruled out state assistance to the bank. DB is struggling amid a still slow Eurozone economy, pinched net interest margins from the European Central Bank’s ongoing bond buying stimulus, risks from the looming U.K. exit from the European Union and reports the U.S. Department of Justice may seek up to $14 billion in sanctions related to sales of residential mortgage backed securities.
The stock is in free fall just months after management was forced to publicly defend their capital position.
Wells Fargo & Co (NYSE:WFC) shares fell 1.9% to test their February/June lows as political pressure builds against the bank and its management team amid the fallout from a scandal involving the creation of fake accounts to boost metrics and pay. Also weighing on shares are reports the Fed will seek higher capital reserves from the largest U.S. banks.
In response to the selling pressure hitting the financial sector, I recommended new put option positions against Bank of America Corp (NYSE:BAC) and Morgan Stanley (NYSE:MS) to Edge Pro subscribers.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
