US Equity Markets Weaken Amid Lower GDP Figures

Posted on | November 24, 2009 |

US equity markets were unable to hold onto yesterday’s gains today, as renewed banking sector concerns and downward revisions to American third-quarter GDP figures tainted sentiment.

Investors are beginning to feel somewhat cautious over the health of the global banking sector today after a German media report claimed that WestLB’s majority owners might withhold support for the struggling German bank. Tensions later eased however, after government sources confirmed that WestLB’s ‘negotiations are progressing well.’

Although things at WestLB appear to be sorting themselves out for the time being, all it takes is just one casualty to send us back a few steps.

Chinese regulators are also beginning to worry about the health of their domestic banking sector, as capital levels in the country’s banking system are beginning to look depleted following a year of blowout lending.

The Wall Street Journal reported that Chinese regulators are starting to put their foot down and urge domestic banks to comply with its capital requirements or face sanctions. Bloomberg, meanwhile, confirmed that five of China’s largest banks have already put forth capital raising plans to regulators.

Credit ratings agency Standard & Poor’s yesterday said it expects banks to ‘continue strengthening capital ratios’ as regulators demand higher standards. ‘It is widely anticipated that regulatory capital requirements for banks will increase materially in the next few years,’ said S&P’s credit analysts. [1] This could mean that we may eventually enter another widespread phase of banking sector rights issues.

A downward revision to America’s third-quarter GDP figures dealt a blow to stock market sentiment today.

According to the Commerce Department, the US economy expanded at an annual rate of 2.8% in the third quarter. This was substantially lower than the 3.5% expansion it reported last month. The downward revision came on the back of a smaller gain in consumer spending and a larger trade deficit.

The GDP figures weren’t the only disappointment unfortunately. One report revealed that US house price growth lost momentum in September, while another indicated that manufacturing activity in the Richmond region grew substantially less than anticipated.

The S&P/Case-Shiller’s 20-city house price index rose by only 0.3% last month following a 1.2% rise the prior month. This was also below Reuters’ expectations for a 0.8% increase. Separately, the Richmond Federal Reserve’s manufacturing index unexpectedly fell to a reading of 1 this month down from 7 in September. The New York Empire State manufacturing index, released last week, also came in softer than anticipated.

On a positive note, a separate report released today revealed that US consumer confidence improved this month, rising to 49.5 from 48.7 in October. Although this data offset consumer spending concerns, it did little for stock market confidence today.

By 3.30pm (London time), the Dow Jones Industrial Average was trading 60.24 points (-0.58%) below its previous close at 10390.71, while the broader S&P 500 was 5.6 points (-0.51%) lower at 1100.64. The Nasdaq was also in negative territory, down 13.38 points (-0.75%) to 1779.56.

Source: [1] Dow Jones Newswires (24 November 2009)

By Anthony Grech, Research Analyst, IG Index.

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