US equity markets witnessed a lacklustre start today, with the S&P 500 and Dow Jones Industrial average swinging between gains and losses during the first half hour of trading.
But negative sentiment appeared to dominate the session despite the release of better-than-expected US macroeconomic data.
On the data front, today was the final reading for the Reuters/University of Michigan consumer sentiment index, which came in at 65.1 in April, higher than the preliminary reading of 61.9 and 57.3 in March.
In the meantime, a separate report from the Institute for Supply Management (ISM) added to the perception that the US economic slump was starting to stabilise. The reading for the ISM manufacturing index rose to 40.1 in April, beating Reuters’ expectations for a rise to 38 from 36.3 the month before. Although better-than-anticipated, the reading is still below 50, which means the sector is shrinking, but at least at a slower pace.
The revelation of a decrease in US factory orders for March was disappointing, however. Bookings fell by 0.9% following a revised 0.7% gain in February. The latest drop was steeper than the 0.6% decline expected by Reuters and February’s data was revised lower from an originally reported 1.8% gain.
The market morale was also tainted by the fact that a number of companies produced first-quarter earnings that did not live up to expectations today. ‘The markets have been anticipating some kind of economic recovery in the last three months of the year,’ said Russell Rolnick of Lenox Advisors. ‘If that doesn’t look like it will come to fruition, the market will take that as a negative signal.’ [1]
MetLife was among the companies that disappointed investors today: the largest US life insurance company today reported its first quarterly loss since 2001 as result of lower returns from investments and writedowns. It produced a first-quarter profit of 20 cents a share, missing Bloomberg’s average analyst estimate by 40%. Shares in MetLife plunged 5% to $28.24 a share following the publication of its results.
In addition, MasterCard, Visa’s smaller rival, delivered a first-quarter net profit of $367.3 million, or $2.81 a share, representing an 18% decline from the same period a year ago. Revenues were also weaker, down 2.2% to $1.2 billion. The company attributed the weaker results to a strengthening US dollar, which reduced overseas revenues and credit card spending. MasterCard’s share price tumbled 6.1% to $172.25 a share this afternoon.
US banks were having a bit of a volatile day but primarily trading higher by late afternoon trading. Bank of America edged marginally higher, up 0.3% to $8.96, Citigroup climbed 2.6% to $3.13 and Wells Fargo advanced 1% to $20.22 a share. The sector initially appeared shaky today as investors fretted about the delay in the release of the US banking sector stress test results.
The Federal Reserve has opted to postpone the stress tests results on the 19 largest US banks to a later date; the final results were originally scheduled for publication on May 4, however, it is now being rumoured they may be made available later on in week. The new ‘official’ release date may be announced by the US authorities this evening.
It is also being rumoured that certain bank executives are debating the preliminary stress test results issued to them by the authorities; perhaps the main reason why the US government has decided to postpone the publication until a later date.
The stress test results are important because it tells the US government which banks have sufficient capital levels to survive deeper recessionary pressures. It is currently being rumoured that US authorities want banks to achieve a minimum standard, which includes a tangible common equity equal of approximately 4% of a bank’s assets and a Tier 1 capital of about 6%, among others.
Banks failing to achieve the US government’s desired minimum capital standards will be given up to six months to comply. Treasury Secretary Timothy Geithner said that banks may raise the funds from third parities (including the US government) or convert the government’s preferred shares into common equity. These solutions may not bode too well with existing shareholders, however, as it would dilute their existing shareholding.
A 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 those shareholders that do not participate will end up having their shareholding diluted anyway. In addition, the odds of a successful rights issue, given the current environment, are quite slim, but then again that may depend on the size of the issue. Another way to go about it is to raise the required capital by initiating a bond issue.
Recently, we were given a few tips as to which banks may be required to raise more money: Citigroup has apparently entered an agreement to sell its Japanese retail brokerage unit Nikko Cordial Securities and parts of its investment banking division Nikko Citigroup to Sumitomo Mitsui Financial Group for 545 billion yen.
Goldman Sachs, the other company, yesterday decided to sell bonds and shares, issuing $2 billion in five-year notes without a government guarantee and making a $750 million stock offering.
By around 3.40pm (London time) the Dow Jones Industrial Average was 47.23 points (-0.58%) lower at 8120.89 while the broader S&P 500 had fallen 3.82 points (-0.44%) to 868.99.
[1] Source: Bloomberg News (30 April 2009)
By Anthony Grech, Research Analyst, IG Index.
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