Wall Street opened lower this afternoon as losses in European bourses and a sharp rally in the previous session enticed investors to take profits.
The slide did not last very long, however, as a surprise surge in pending home sales fuelled another buying frenzy – it will be interesting to see if Friday’s non-farm payrolls will continue to signal a recovery in the American economy.
US stock market confidence changed dramatically this afternoon, especially following the release of pending home sales data, which revealed a 6.7% surge in the number of Americans signing contracts to buy previously owned homes in April. That’s the biggest gain in five years and substantially better than Bloomberg’s expectations for a 0.5% increase from the previous month’s 3.2% gain.
‘Home sales are stabilising,’ said Zach Pandl of Nomura Securities International. ‘We’ve stopped falling, but as of yet there are few signs that we’ve started recovering. The end of the decline is the first step.’ [1]
Not surprisingly, this development lifted homebuilders this afternoon, with shares in DR Horton advancing 2.6% to $9.49, Centex Corp rising 1.7% to $8.49 and Pulte Homes gaining 1.5% to $8.81.
US banks, in contrast, were trading in negative territory, with Morgan Stanley, JPMorgan and American Express in focus after unveiling they had raised funds to repay TARP funds.
Morgan Stanley has reported that it sold $2.2 billion worth of common stock, while JP Morgan sold $5 billion and American Express sold $500 million worth of stock to pay off some of the government aid.
JPMorgan and American Express, which were among the few banks that did not require additional capital under the government’s stress tests, had to comply with a Fed rule which states that any firm seeking to repay bail-out funds had to first tap equity markets.
‘This is just making it more costly to leave TARP, which may discourage some of the lesser players from stretching to try to leave TARP,’ said Brad Hintz of Sanford C Bernstein & Co. The government is saying ‘we need to make sure that in a dynamic world you can continue to raise capital.’ [2]
SunTrust Banks also announced plans to sell $1.4 billion of common stock and buy back $1 billion of preferred shares and hybrid securities. It said that the proceeds will be used to boost its Tier 1 capital and help close the $2.2 billion capital deficit identified in last month’s stress tests.
Shares in JP Morgan slumped 3.5% to $34.86, Morgan Stanley fell 3.65% to $28.8 and credit card company American Express tumbled 4.6% to $24.79. Citigroup was also a casualty, falling 3.5% to $3.56 after being dropped from the Dow Jones Industrial Average. The company is being replaced with Travelers Companies.
General Motors, meanwhile, was dropped from the Dow Jones Industrial Average and S&P 500. It will be replaced by Cisco Systems and DeVry, respectively.
Interestingly, General Motors today announced that it has reached a deal to sell its Hummer brand, but it did not say who the buyer was or for how much it was being sold for.
Elsewhere, Microsoft made the headlines, saying that its Xbox console was not just a hub for home entertainment but also a ‘gateway for movies, television and social networking.’ The company’s shares gained 1.5% to $21.7.
By around 3.35pm (London time) the Dow Jones Industrial Average was up by 31.44 points (+0.36%) to 8752.88, while the S&P 500 had climbed 3.38 points (+0.36%) to 946.25.
[1] Source: Bloomberg News (2 June 2009)
[2] Source: Bloomberg News (2 June 2009)
By Anthony Grech, Research Analyst, IG Index.
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