Negative Financial Market News Pushes Investors to Take Profits

Posted on | May 21, 2009 |

An unexpected flood of negative news from both sides of the Atlantic deflated hopes of an early economic recovery, enticing investors to take profits.

Firstly, the Federal Reserve released a gloomy report last night, indicating that the US economy is likely to sink deeper into a recession this year. The Fed said it expects the US unemployment rate to hit 10% this year and that the economy may shrink between 1.3% and 2% in 2009 – substantially worse than earlier forecasts for a 0.5% to 1.3% contraction. It also said that the recovery in 2010 and 2011 will be slower than initially thought.

The former Fed chairman Alan Greenspan added to the gloomy picture by saying that he sees a bigger capital shortfall in the banking system than reflected in regulators’ stress tests. [1]

Secondly, US weekly jobless claims data released this afternoon continued to point to a weakening labour market. Although the number of Americans claiming first-time unemployment benefits (initial jobless claims) in the week ending 16 May dropped 12,000 to a seasonally adjusted 631,000, the previous week’s figure was upwardly revised to 643,000 from an originally reported 637,000.

In the meantime, the total number of American’s claiming unemployment benefits for more than one week (continuing jobless claims) surged by 75,000 to a new record high of 6.662 million.

It doesn’t end there, however. Credit rating agency Standard & Poor’s revised Britain’s economic outlook from ’stable’ to ‘negative’ today, stating that the country’s triple-A rating was also at risk of a downgrade if it doesn’t sort out its public finances.

The agency said that UK government debt could rise to 100% of GDP by 2013, a level which is inconsistent with a triple-A credit rating. At this juncture, UK public debt stands at around 53% of GDP.

Could the dent in market confidence spell the beginning of a global stock market correction?

By around 3.30pm (London time), the Dow Jones Industrial Average had plunged 149.58 points (-1.78%) to 8272.46, while the broader S&P 500 was knocked 16.56 points (-1.83%) below its previous close to 886.91. Britain’s FTSE 100, meanwhile, was down 134.21 points (-3%) to 4334.2.

Energy shares were among the worst performers so far today, with Exxon Mobil Corp down 1.7% to $68.45 and Chevron 1.9% lower to $64 a share. Schlumberger plummeted 5.8% to $51.84, while ConocoPhillips lost 2.5% to $44.56.

Companies operating in the transportation sector also suffered a heavy blow, with the likes of Union Pacific Corp and DryShips down by more than 4% to $27.97 and $6.28, respectively. Meanwhile, basic materials company Caterpillar plunged 4% to $35.79.

Financial companies, surprisingly, were not hit as hard as expected. Citigroup’s share price traded in a narrow range and swung between gains and losses. By around 3.30pm (London time) Citigroup’s share price was down by 0.27% to $3.68.

Bank of America, meanwhile, also performed relatively well, falling only 0.44% to $11.44. The FT today reported that Bank of America is trying to repay the entire $45 billion worth of TARP aid by the end of the year, offsetting fears that it will be the last bank to repay the government.

In contrast, Fifth Third Bancorp was among the worst performing banks today, tumbling 9.34% to $6.99 after opting to sell $750 million worth of new shares in order to raise the funds required under the stress test.

A few bright spots emerged from the technology sector, however. Computer Sciences rose 6.3% to $39.48 after more than doubling its profits, while NetApp climbed 3.5% to $17.91 after posting earnings that beat analyst expectations. The company also announced that it is planning to acquire Data Domain, a rival data storage company, for $1.5 billion to help its international reach. [2]

[1] Source: Bloomberg News (21 May 2009)
[2] Source: Financial Times (21 May 2009)

By Anthony Grech, Research Analyst, IG Index.

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