Sometimes markets don’t act like they “should” do. Today US GDP came in at -6.1% for Q1, significantly worse than consensus expectations, yet markets have rallied today. Even the revelation that 6 out of the 19 banks being examined as part of the US stress test will need further funds, hasn’t dented enthusiasm today.

It certainly is a good day for banks across the world with Barclays in the UK hitting its highest levels since October of last year. Santander’s results have certainly helped sentiment in the sector across Europe.

We still have the FOMC meeting to come which could reverse today’s initial optimism, but the way markets are rallying today in the face of seemingly bad news, it could take something significant to reverse today’s gains.

Oil’s resurgence is certainly helping this with Shell following BP with better than expected results. Oil is trading higher at $51.12 today.

By David Evans of at betonmarkets.co.uk

The above comments do not constitute investment advice and neither BetOnMarkets nor Spread-Betting.org accept any responsibility for any use that may be made of them.

Fresh banking sector fears and negative sentiment instigated by the deadly swine flu outbreak knocked US equity markets a notch lower at the start of the trading day today. Confidence in US stocks, especially towards airlines, returned by late afternoon trading, however.

It has emerged that unidentified sources close to the matter have told the Wall Street Journal that the results of the US government’ stress tests indicate that Citigroup and Bank of America may need to raise billions of dollars in capital to strengthen their balance sheets. Both banks are said to be objecting to the preliminary findings, however, with Bank of America expected to put forth an appeal later today. The newspaper did not make reference to other banks but did say that some analysts believe that some regional US banks, especially those with big portfolios of commercial real-estate loans, fared poorly on the stress tests. The expectation so far is that Regions Financial Corp, Fifth Third Bancorp and Wells Fargo may end up requiring more capital as well. According to the Wall Street Journal, US government officials said that banks requiring further capital should not be viewed as insolvent, explaining that the capital is intended to act as a cushion against potential future losses – it can be thought of as a precautionary measure if you like. Banks requiring the additional capital will have up to six months to comply and may raise the funds from third parities (including the US government) or convert the government’s preferred shares into common equity. These solutions would not bode too well with existing shareholders, however, as it would dilute their stake further. One way to prevent this dilution from occurring is for a bank to sell non-core assets or initiate a rights issue, which is a share sale to existing shareholders. The problem with the latter is that shareholders that do not participate will end up with a diluted shareholding anyway. In addition, the odds of a successful rights issue, given the current environment, are quite slim in my opinion. Elsewhere, it is rumoured that Citigroup has reached an agreement in principle with Japan’s Sumitomo Mitsui. As it turns out, the Japanese bank is planning to purchase some of Citigroup’s operations in Japan. These operations include Nikko Cordial Securities, Citigroup’s retail brokerage unit, and some operations of Nikko Citigroup, a wholesale investment bank. Adding to the negative pressure on the financial sector today was a report from Deutsche Bank. The investment management firm said internal studies indicate that Bank of America and Wells Fargo will require additional capital. Citigroup shares slid 4.9% to $2.92 while Bank of America plunged 7.7% to $8.24. Meanwhile, Wells Fargo fell 2% to $19.88 and Regions Financial Corp declined 5.87% to $4.63. Elsewhere, the negative sentiment that haunted US travel-related stocks yesterday, predominantly on concerns about the swine flu outbreak, made a complete turnaround today; shares in Delta Air Lines were up by 1.04% to $6.82, AMR Corp climbed 7.02% to $5.03 and Southwest Airlines jumped 6.7% to $7.34 – perhaps investors are speculating that yesterday’s sell-off was overdone? The current outbreak has seen some drug stores benefit. CVS Caremark, Rite Aid. and AS Watson Group are said to be placing additional orders for Roche Holding’s drug Tamiflu, while 3M Co. and Alpha Pro Tech are making more face masks, a Bloomberg report revealed today. Pharmaceutical firm Gilead Sciences was up 0.8% to $47.91 today as investors speculate that it will benefit from higher demand for its products. ‘If SARS is any indication, you would see cleaning products like soaps do well,’ said Ali Dibadj of Sanford C. Bernstein & Co. [1] Also today, Pfizer reported better-than-expected first-quarter profits after aggressive cost cutting efforts. The firm has reaffirmed its full-year revenue outlook. Shares of the drugmaker fell 1.56% to $13.28, however, despite gaining during pre-market trading. In contrast, US Steel Corp, the country’s biggest steelmaker, has cut its dividend after reporting a first-quarter net loss that was worse than anticipated . Its share price consequently plunged 5.2% to $26.3. In economic news, the annual S&P/Case-Schiller Index for February, a gauge of home prices in 20 major US metropolitan areas, came in 18.6% lower in February as opposed to a 19% drop the month before. The latest result was better than Bloomberg’s median forecasts for a drop of 18.7%. On the month of February, the S&P/Case Schiller Index fell 2.2% after falling 2.8% tin January. In the meantime, a separate report showed the Richmond Fed Manufacturing Index for April rising to -9 from -20 the month before and the US Consumer Confidence Index for April rising to 39.2 from 26. Today’s economic figures add to the view that the US economy is starting to show signs of stability. By 3.30pm (London time) the Dow Jones Industrial Average rose 16.08 points (+0.20%) to 8041.08 while the S&P 500 Index had gained 1.59 points (0.19%) to 859.10. [1] Source: Bloomberg News (27 April 2009) By Anthony Grech, Research Analyst, IG Index.

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The rapid spread of the deadly swine flu outbreak hit US shares, particularly travel related stocks, this afternoon.

The United Nations has warned that the virus has the potential of becoming a pandemic after rapidly spreading from Mexico, where officials suspect it has caused the death of more than 100 people, to the United States, Canada and now Spain.

A number of countries have begun screening air passengers for symptoms of the virus and a few European tour operators are said to have suspended trips to Mexico. Moreover, imports of pork products from Mexico and parts of the US have been banned.

This development dealt a severe blow to airlines, with shares in US Airways plunging 18.8% to $3.93, Delta Airlines tumbling 17.13% to $6.53, AMR Corporation falling 15.9% to $4.56, and Continental Airlines sliding 15.8% to $11.16 within the first half hour of trading today.

Also feeling the brunt was hotel group Marriot International, falling 5.8% to $21, Starwood Hotels & Resorts sliding 8.5% to $19.05 and Wyndham Worldwide retreating 8.3% to $9.27 per share.

Sentiment towards banks was also weak, especially after Richard Bove, an influential analyst, downgraded Wells Fargo from ‘buy’ to ‘hold’ [1]. Investors also fear that the final banking sector stress test report, scheduled for release in early May, will force bailed-out banks to raise more money or convert the government’s preferred stock into common shares, a situation that would further dilute the shareholding of existing shareholders.

Shares in Wells Fargo fell 3.4% to $20.68 following Mr Bove’s downgrade, while shares in Citigroup declined 1.3% to $3.15, JPMorgan Chase traded 0.45% lower to $33.23 and Morgan Stanley declined 0.55% to $21.84.

There has been talk about the auto sector today. As it transpires, General Motors has unveiled new restructuring plans; it is offering bondholders the opportunity to convert their debt into equity, in an attempt to cut down $44 billion worth of debt. It is also planning to sell off its Pontiac division and announce another round of cost-cutting measures. Shares in GM surged 29% to $2.18 following this announcement, while rival Ford climbed 7.4% to $5.37 a share.

On the earnings front, cell phone chip supplier Qualcomm produced disappointing first-quarter earnings, hurt by investment losses and costs relating to its legal settlement with Broadcom. Qualcomm’s shares rose 6% to $43.85, nevertheless.

Meanwhile, larger rival Verizon Communications reported better-than-expected quarterly profits and a 12% rise in revenue, helped by the acquisition of a smaller rival and growth in cell-phone customers. Shares in Verizon fell 0.7% to $30.78, however.

By around 3.45pm (London time) the Dow Jones Industrial Average had managed to climbed 17.84 points (+0.22%) to 8094.13, while the S&P 500 remained in negative terrain, down 0.10 points (-0.01%) to 866.13.

[1] Source: Reuters News (27 April 2009)

By Anthony Grech, Research Analyst, IG Index.

The above comments do not constitute investment advice and neither IG Index nor Spread-Betting.org accept any responsibility for any use that may be made of them.
Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Despite Bank of America’s better-than-expected first-quarter results, Wall Street opened sharply lower this afternoon as investors fear that rising unemployment will lead to a surge in banking sector bad debts.

Bank of America (BofA) today produced first-quarter profits that were more than double of last year’s earnings, helped by strong contributions from Merrill Lynch. The largest US bank by assets reported a net income of $4.24 billion for the first-quarter, up from $1.21 billion a year ago. After taking into consideration the impact of preferred stock dividends, however, net income to common shareholders came in at $2.81 billion, up from a comparable figure of $1.02 billion from the year before.

On a per-share basis, first-quarter earnings came in at 44 cents or 17 cents a share excluding extraordinary items, thus beating Reuters’ consensus expectations of 4 cents a share.

The bank said that Merrill Lynch, which was acquired on January 1 2009, contributed $3.7 billion to net income (excluding certain merger costs), while an increase in mortgage lending and refinancing volumes helped Countrywide Financial, purchased on July 1 2008, add to net income as well. BofA confirmed that both companies were on track to meet targeted costs savings, with Countrywide Financial actually ahead of schedule.

‘The fact that we were able to post a strong, positive net income for the quarter is extremely welcome news in this environment,’ said Kenneth Lewis, chairman and chief executive officer of the bank. ‘It shows the power of our diversified business model as well as the ability of our associates to execute. We are especially gratified that our new teammates at Countrywide and Merrill Lynch had outstanding performance that contributed significantly to our success.’ [1]

So far so good, but the worrying part in all of this is that BofA may not be able to sustain the performance seen in the first quarter because there were some very large one-off contributions; BofA received $1.9 billion from selling its shares in China Construction Bank and benefitted from an additional $2.2 billion gain emanating from declining bond prices.

Also worrying is the rapid deterioration in the bank’s asset quality. BofA today revealed that credit quality had deteriorated further across all divisions as house prices continue to decline on the back of weak economic conditions. ‘Consumers are under significant stress from rising unemployment’ and ‘these conditions led to higher losses in almost all consumer portfolios,’ BofA explained. This was reflected by a surge in BofA’s bad debts, which jumped from $7.8 billion last year to $25.7 billion as a growing number of Americans defaulted on mortgages.

‘I don’t see anything that makes me think all of a sudden people are going to take the pressure off Lewis,’ said Walter Todd, a portfolio manager at Greenwood Capital Associates. ‘The biggest question I have is; what is going on with these non-performing assets?’ [2]

Not surprisingly, BofA’s share price was knocked 10.4% lower to $9.50 this afternoon. Losses soon spread to rival banks as well, with Citigroup plunging 11.5% to $3.24, Wells Fargo tumbling 7.2% to $18.81 and JPMorgan Chase sliding 4.5% to $31.75.

It has been astounding to see the value of some banks more than double over the past month, but today’s reaction seems to suggest that the euphoric state may very well have come to an end. I say this because fundamental problems in the banking sector have not yet been resolved, contrary to what some may be thinking.

Also today, Oracle the world’s largest enterprise software company, has agreed to acquire Sun Microsystems in a $7.4 billion cash deal after negotiations with IBM collapsed. This means that Oracle will be paying $9.5 for each Sun share, a 42% premium to Friday’s close of $6.69.

Oracle President Safra Catz said the acquisition, which the companies expect to close this summer, will add at least 15 cents per share to Oracle’s earnings in the first full-year after closing.

The deal would strengthen Oracle’s position against IBM. Oracle has done a good job on the acquisitions it had done earlier,’ said Robert Jakobsen of Jyske Bank. ‘It makes sense also historically. Oracle has been more successful commercialising software than Sun.’ [3]

Shares in Oracle fell 5.4% to $18.03 following the surprise announcement, while Sun’s share price jumped 36% to $9.10 this afternoon.

By around 3.40pm (London time) the Dow Jones Industrial Average had plunged 212.27 points (-2.61%) to 7919.06, while the broader S&P 500 had declined 25.1 points (-2.9%) to 844.5.

[1] Source: Bank of America website (20 April 2009)
[2] Source: Reuters News (20 April 2009)
[3] Reuters News (20 April 2009)

By Anthony Grech, Research Analyst, IG Index.

The above comments do not constitute investment advice and neither IG Index nor Spread-Betting.org accept any responsibility for any use that may be made of them.

Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Following on from yesterday’s gloomy US retail figures the Dow Jones duly opened lower, down a modest 0.5% in early trading, while the broader S&P 500 was similarly 0.6% off the pace. But it wasn’t all bad news.

The raft of key economic data from the US contained the expected gloomy news, but also more positive news too, including the somewhat unexpected announcement that the US consumer price index dropped 0.1% in March against a 0.4% rise in February. This fall means that consumer prices experienced the first annual decline since 1955. However, US government data also showed that industrial production fell for the fifth consecutive month to a ten-year low.

Analysts from Barclays Capital were among the few who had correctly predicted the fall in US consumer prices, saying: ‘If our forecasts are correct, the stronger production and lower prices are likely to be mildly supportive of risky assets: lower prices means more scope for continued policy stimulus.’ [1]

By around 3.20pm (London time) the Dow Jones Industrial Average had rallied and was up 29.47 points (+0.37%) while the S&P was 1.49 points (+0.92%) up on the day. The FTSE 100 experienced a mixed morning, falling then rising as the downward financial and mining sectors (Lloyds, Fresnillo) did battle with a resurgent oil and gas sector (BG Group). However, at 3.00pm (London time) the FTSE was down just over 25 points (-0.64%) on the day. #

Meanwhile the pound was less flat, rallying against the dollar to reach just above the $1.50 mark, its highest level in three months, and a six-week high against the euro to E1.13. This followed the publishing of a survey from the Royal Institution of Chartered Surveyors suggesting that house sales would pick up.

In a Bloomberg survey of confidence in the Global Economy, Chris Rupkey, chief financial economist at Bank of Tokyo Mitsubishi UFJ in New York, has suggested there is light at the end of a long tunnel: ‘The outlook was completely hopeless a month ago and now there’s a slight ray of hope that a recovery in financial markets will lead to a recovery in the broader economy. Things are not as gloomy as before. We will improve slowly, probably in fits and starts.’ [2]

Following the Obama administration’s promise to disclose data on the health of all the US’s biggest banks earlier this week, investors can top-up their knowledge with the first-quarter earnings report of JP Morgan Chase scheduled for release tomorrow. Friday sees the release of General Electric’s first quarter earnings, which is always a useful temperature gauge for the global economy.

[1] Source: Bloomberg News (15 April 2009)
[2] Source: Financial Times (15 April 2009)

By Anthony Grech, Research Analyst, IG Index

The above comments do not constitute investment advice and neither IG Index nor Spread-Betting.org accept any responsibility for any use that may be made of them.

Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Financials are on fire today and lifting global markets with them as positive headlines hit investors in waves today. It started as a reasonable day anyway for European markets, but the opening surge from the US has pushed markets even further into positive territory.

In the UK, Barclays finally closed out the sale of iShares with the £3bn fee coming in around average estimates. Some had thought it could go for much more, but there seems to be a general relief that the deal has gone through full stop.

Wells Fargo added fuel to the fire by coming in with results that topped analysts’ estimates. Wells is up nearly a quarter on the day, with most of the UK and US financials up by around 10%.

Another catalyst for the buying frenzy has been the New York Times reporting that all the 19 examined US banks have passed the treasury stress test. The exact results are going to be delayed until after earnings season, but the general relief that there will be no major surprises has flushed traders with confidence.

US jobless were dismal, but slightly less dismal than before. The drop in total claims was less than expected, though the continuing jobless claims continues to rise. If there has been a consistent barometer of economic sentiment this year, it is oil and true form, crude prices have risen back above the $50 market after dipping below that level yesterday.

The bank of England rate statement was a bit of a non event as they kept rates on hold as largely expected. Currency markets are quiet today with more forex pairs range bound ahead of the long weekend.

By David Evans of http://www.betonmarkets.co.uk.

The above comments do not constitute investment advice and neither BetOnMarkets nor Spread-Betting.org accept any responsibility for any use that may be made of them.

Global markets have started to pull back after the largest four week winning streak on US markets since 1983. After rallying by nearly a quarter from the lows of February, investors are understandably keen to book profits. Debate now rages as to whether the recent rally was the start of a meaningful recovery or what is know as a bear market rally.

We have a situation where the market was on a hot streak and arguably due a correction. This may make markets more susceptible to bad news than they were over the last four weeks when it seemed they developed a Teflon coating.

A prediction from respected analyst Mike Mayo, stating that the banks will bank loan losses will exceed depression levels has certainly stunted investors confidence in the financial sector today. Fears persist that markets still haven’t priced in just how bad earnings from US companies are going to be in the next few months. The risk/ reward of this being the case was more appealing when markets were at their lows in February.

As a sign of retreat from risk taking, defensive sectors such as utilities are performing well today with Pennon and United Utilities a couple of the standout performers.

Gold has slumped dramatically as currency markets continue trade in volatile fashion. The dollar has now reversed its early losses on the day and is performing well against the euro and sterling.

Oil prices have taken a dip towards $50 once again, but so far are holding around $51.

By David Evans of http://www.betonmarkets.co.uk.

The above comments do not constitute investment advice and neither BetOnMarkets nor Spread-Betting.org accept any responsibility for any use that may be made of them.