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Dow closes more than 200 points lower if banks sell, breaking a two-week winning streak

The Dow Jones Industrial Average fell Friday after the Federal Reserve decided not to extend a pandemic period capital hiatus for banks, causing bond yields to spike and financial stocks to sell off.

The blue chip Dow fell 234.33 points, or 0.7%, to 32,627.97, which was put under pressure by Visa and JPMorgan. The S&P 500 fell 0.1% to 3,913.10, closing its lowest point of the day when it fell 0.7%. The Nasdaq Composite was up 0.8% to 13,215.24 as investors bought the decline in technology stocks. Facebook grew 4%, while Amazon and Netflix each gained 1.5%.

The central bank declined on Friday to extend a month-end rule that eased the additional leverage ratio for banks during the pandemic. The rule that banks may hold less capital against government bonds and other equity investments was introduced to calm the bond market during the crisis and to encourage banks to lend.

The decision could have some detrimental effects, traders have warned if banks sell some of their treasury holdings in response. This could lead to even higher returns if a rapid rise in interest rates is already annoying investors.

“This is a disappointment for investors that the Fed has decided not to renew it,” said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. “At least a few weeks ago there were great expectations that the Fed would relieve the SLR for the big banks, since so many issues have to be absorbed by government bonds.”

Bank stocks were sold jointly after the Fed’s decision. JPMorgan and Goldman Sachs both fell more than 1%, while Wells Fargo fell 2.9%. Bank of America was also down 1%. These names got a boost from rising interest rates earlier this week and have all climbed double digits this year.

Meanwhile, bond yields rebounded from their lows following the announcement. The 10-year government bond yield reversed before flattening at 1.73% and near its 14-month high. The key rate started below 1% in 2021. (1 basis point corresponds to 0.01%).

“The speed at which it got to this level was too fast for comfort,” said Chang. “When returns go up, it’s harder to justify the increased valuation.”

Rising bond yields, which can signal confidence in the economic recovery, can also make high-growth stocks less attractive to investors by diminishing the value of their future cash flows.

The Dow and S&P 500 lost 0.5% and 0.8% respectively this week, breaking their two-week winning streak. The tech-heavy Nasdaq was also down 0.8% this week, posting its fourth negative week in five.

“The big fear is that some banks may resist lending because they may have trouble putting more capital aside,” said Edward Moya, senior market analyst at Onada. “Wall Street will be closely following the upcoming Treasury auctions. If bank interest is low, the bond market sell-off could intensify.”

FedEx shares rose 6% on Friday after the delivery company top and bottom beat expectations for the third fiscal quarter.

Nike stock was down nearly 4% after third-quarter sales were weaker than expected. Visa shares fell 6.2% after the Justice Department issued a report opening an investigation into its debit card business and possible anti-competitive practices.

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Katherine Clark