US stock prices swung dramatically intraday, as investors recovered early losses and grappled with the unprecedented legal pressure placed on Federal Reserve Chairman Jerome Powell.
After plunging Monday to its session lows, the S&P 500 returned to positive territory at midday. Bank shares fell amid an investigation by the Justice Department into Powell.
Investors were also influenced by the lingering fear over President Trump’s plan to cap interest rates on credit cards at 10%.
The US stock market’s rebound hides the banking sector’s weakness
The market was volatile on Monday as it absorbed two shocks that affected financial stability and currency independence.
S&P 500 dropped as low as 0.7%, before recovering in the afternoon trade. However, the broad index continued to be under pressure.
Both the Nasdaq Composite and Dow Jones Industrial Average traced similar U-shaped patterns. Defensive technology stocks like Walmart provided ballast, while financial stock prices tumbled.
The selling was mainly concentrated in the banking sector. Capital One’s shares fell nearly 9% in the early trade, Citigroup dropped roughly 3 to 4 % and JPMorgan Chase declined more than 3%.
American Express dropped 4.4% and payment processors Visa & Mastercard both fell nearly 2%, as investors re-priced the earning potential of credit cards downward.
Bank of America, a smaller lender, also fell by more than 1 percent as traders feared that regulatory actions or congressional action on interest rate caps would put pressure on the profitability of loans.
The broad market indexes showed resilience in spite of the volatility experienced by the financial sector.
Investors shifted their focus to names that they perceived as being less susceptible to regulatory or political action.
Concern about legal action and Fed independency
Powell was also concerned about the market.
In a video message released on Sunday night, the Federal Reserve chair revealed that grand jury subpoenas had been served by the Department of Justice in relation to his testimony given before the Senate Banking Committee back in June.
The Federal Reserve has spent $2.5 billion renovating its Washington Headquarters.
Powell called Powell’s action “unprecedented”, and directly linked it to Trump’s frustration at the Fed’s unwillingness to reduce interest rates aggressively.
Powell said that the threat of criminal prosecution for setting rates of interest based upon my judgment as to what would best serve the public was a clear pretext.
Subpoenas are a constitutional rarity: Federal prosecutors opening an investigation against a Fed Chair who is still in office over policy choices raises serious questions.
The market strategists pointed out that such a move could destabilise confidence in the Fed’s autonomy. This is exactly what investors require to accurately price assets in a world of stock prices nearing record highs.
Trump’s proposal at the weekend to cap credit card interest rates by 10% on January 20, sent issuers scrambling for ways to assure investors that Congress is unlikely to act.
The fact that an incumbent president could move the stock of a bank by as much as 9% just by announcing his regulatory intentions shows how fragile the financial regulatory environment is.
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