Global stocks skidded and the dollar jumped on Tuesday after Moody’s cut the credit ratings of 10 small to mid-sized US banks and China’s trade data was worse than forecast in July, raising caution about the economic outlook.

The yuan slid to a three-week low as Asian stocks and the Australian and New Zealand dollars, seen as proxies for Chinese growth, turned weaker. The data also heightened pressure for China to provide fresh stimulus to prop up demand.

Moody’s also placed six banking giants, including Bank of New York Mellon, US Bancorp, State Street and Truist Financial, on review for potential downgrades in a move that tempered a still strong outlook for US growth.

Longer term there’s unlikely to be an issue, but rising interest rates and regional banks’ exposure to commercial real estate has cast a cloud over the market, said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.

“Investors are using some of this news to trim positions that have done very well,” he said. “Markets are just going through a period where investors are questioning whether stock prices have run ahead of some of the fundamentals.”

MSCI’s U.S.-centric gauge of stocks across the globe shed 1.13%, while the pan-regional STOXX 600 index in Europe lost 0.31%.

Italy sent shockwaves across the European banking sector by setting a one-off 40% tax on Italian bank profits reaped from higher rates, after reprimanding lenders for failing to reward depositors.

The euro zone bank index fell 3.78% and was on track for its biggest daily fall since the financial turmoil of March.

The Dow Jones Industrial Average fell 416.81 points, or 1.17%, to 35,056.32, the S&P 500 lost 52.39 points, or 1.16%, to 4,466.05 and the Nasdaq Composite dropped 215.61 points, or 1.54%, to 13,778.79.

The S&P 500 is trading around 18.5 times next year’s earnings, and “if we avoid a recession and analysts are right, then the stock market is more fairly valued,” Saglimbene said.

But earnings growth is again negative for the second quarter and is expected to be flat for the third quarter, making valuations for this year a little bit stretched, he said.

The dollar index, a measure of the US currency against six peers, rose 0.588% after the disappointing Chinese trade figures led investors to shift to safer assets.

News that Country Garden, China’s biggest privately owned property developer, had not paid two dollar bond coupons due on Aug. 6, added to signs of severe stress in the property sector.

“What also stands out here is (that) the US growth impulse continues to outperform Europe and China,” said Erik Nelson, macro strategist at Wells Fargo.

“Part of this longer-term dollar-weakness narrative rests on capital shifting out of the U.S. and away from US stocks to the value plays like European banks,” he said, adding that the Italian bank tax “doesn’t help” such flows.

The euro fell 0.55% to $1.0941.

US and European bond yields fell, reversing some of the increases seen over the last week.

The two-year Treasury yield, which typically reflects interest rate expectations, rose 1.4 basis points at 4.772%, while the yield on 10-year notes fell 6.2 basis points to 4.016%. Oil prices fell more than 1.5% after the Chinese trade data.

US crude recently fell 0.79% to $81.29 per barrel and Brent was at $84.64, down 0.82% on the day.

Global investors are also waiting for Thursday’s U.S. inflation figures, which will be a key input into the Federal Reserve’s next interest rate decision in September.

US inflation likely accelerated slightly to 3.3% year-on-year in July, while the core rate was likely unchanged at 4.8%, according to a Reuters poll of economists.

Headline inflation peaked at 9.1% in June 2022 but stood at 3% in June 2023.

Oil prices fell by about 1% on Tuesday after data showed China’s crude imports and exports fell much more than expected in July in yet another sign of a sluggish post-COVID rebound for the world’s largest oil importer.

Brent crude futures were down 78 cents, or 0.9%, at $84.56 a barrel at 11:09 a.m. EDT (1509 GMT). U.S. West Texas Intermediate crude dropped 81 cents, or about 1%, to $81.13. Both contracts fell by $2 earlier in the session.

China’s July oil imports were down 18.8% from the previous month to the lowest daily rate since January, but still up 17% from a year earlier.

Overall, China’s imports contracted by 12.4% in July, far steeper than the expected 5% drop. Exports fell by 14.5%, compared with a fall of 12.5% tipped by economists.

In India, fuel consumption slipped to a 10-month low in July, government data showed on Tuesday, as monsoon rains restricted mobility. India is the third-biggest oil importer and consumer.

Despite the gloomy data, some analysts were still positive on China’s fuel demand outlook for August to early October.

The peak season for construction and manufacturing activity starts in September and gasoline consumption should benefit from summer travel demand, said CMC Markets analyst Leon Li. Demand is expected to decrease gradually after October, he added.

Reuters