US equities opened a notch higher today after credit-rating agency Moody’s Investors Service tried to restore confidence in America’s credit rating outlook. Upbeat developments in the retail and banking sectors also benefitted Wall Street, but sentiment continued to remain cautious nevertheless.
Credit-rating agency Standard & Poor’s yesterday downgraded Britain’s economic outlook from ’stable’ to ‘negative’, citing a surge in public debt as a major concern. This development left the market mulling over America’s prospects as well, but Moody’s Investors Service moved quickly to try and restore confidence, saying it is comfortable with the country’s triple-A sovereign rating, but could not guarantee it forever. What remains to be seen, however, is whether Standard & Poor’s and Fitch Ratings share the same opinion.
Elsewhere, in a move to intentionally dampen potentially damaging speculation concerning America’s economic outlook, Treasury Secretary Timothy Geithner informed markets that the government is committed to reducing America’s budget deficit. ‘It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,’ Mr Geithner told Bloomberg Television in an interview last night.
Mr Geithner also said he intends to substantially change the pay-structure of the US banking sector in order to avoid another financial meltdown in the future.
Meanwhile, department store retailer Sears surprised markets today by posting an unexpected first-quarter profit of $34 million as a $107 million reduction in advertising costs and $84 million cut in payroll expenditure countered weaker sales. This compares with a loss of $36 million recorded the year before.
Sears has reported first-quarter total revenues of $10.1 billion, down 9% from the $11.1 billion recorded a year earlier, and unveiled a 7.4% decline in sales at stores open at least a year. The company also said that it managed to extend the maturity of $2.4 billion worth of debt until June 22, 2012. Its shares price was trading 16% higher at $58.17 a share this afternoon.
After excluding some items, Sears recorded a profit of 38 cents a share. Analysts had predicted a per-share loss of 87 cents, according to the average estimate in a Bloomberg survey.
Global clothing retailer Gap also delivered better-than-expected quarterly earnings today. The company said first-quarter profits fell 14% to $215 million, or 31 cents a share, beating Reuters’ average estimates of 30 cents a share. Revenues were also lower, down 7% to $3.13 billion, as operating costs dropped $73 million on the back of aggressive cost cutting. Gap stores, meanwhile, saw a 12% decline in same-store sales over the quarter. That compares with a 7% drop the year before. Gap’s shares rose 1% to $16.15.
Investors will notice that profits are beating expectations, yet revenues are falling on the back of weaker macroeconomic fundamentals. We could see the revenues of retail companies fall further if America’s labour market does not pick up. Given the fact that they can only cut costs by so much, it will only be a matter of time until profitability starts trailing expectations.
The performance of US banks was mixed this afternoon, with Citigroup up 0.3% to $3.73 on the back of reports claiming that the bank is planning to slash costs significantly by integrating its technology infrastructure. The bank’s management is said to believe these efforts could help it save around $1 billion this year.
Bank of America was trading 1.8% lower to $11.17 a share today, while Wells Fargo had slid 0.84% to $24.83 and Goldman Sachs had gained 1% to $138.6.
Elsewhere in the financial sector, MasterCard, the world’s second-largest electronic payments network, is facing a rough patch. Sources have told Bloomberg News the company could lose more than half of a $59 billion portfolio of debit-card users after JPMorgan Chase decided to shift more business to Visa Inc. Shares in MasterCard fell 0.75% to $170.41 while Visa advanced 0.77% to $66.79.
By around 3.30pm (London time) the Dow Jones Industrial Average was up by 23.42 points (+0.28%) to 1367.53 while the broader S&P 500 was 2.55 points (+0.29%) higher at 890.88. It is also worth mentioning that US and UK markets will be closed on Monday.
By Anthony Grech, Research Analyst, IG Index.
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