Wall Street fell back on caution about the global economy, while second-quarter earnings from JP Morgan failed to impress.
However, some good news appeared later on in the session with news that Slovakia had bowed to the inevitable and voted 'yes' to the expansion of the eurozone rescue fund.
By 4pm (London time), the Dow Jones was down 1.16% at 11,385.12, while the S&P 500 had lost 1.3% to 1191.41. In London, the UK 100 remained in the red, down 1.24% at 5374.18.
Clever accounting helps JP Morgan
JP Morgan kicked off the latest round of bank earnings reports, with headline revenue and earnings that exceeded estimates.
Banking income was broadly unchanged compared to last year, at $4.3 billion, while revenue edged up to $24.4 billion, but the numbers were improved by an accounting manoeuvre that is likely to be replicated by JP Morgan's peers over the next few weeks.
JPM's figures were boosted by what it called a 'debit valuation adjustment', which resulted from a widening of the firm's credit spreads. The gain was assessed at $1.9 billion.
Curiously, this means that the bank actually benefited from an increase in its default risk. Investors were unconvinced however, and in the JP Morgan spread betting market, the shares dropped 5.3% to $31.43. The outlook was also cautious, with third-quarter revenue expected to be lower due to declines in asset values.
US banks have had a difficult summer, to say the least. Since 31 July, the banks index of the S&P 500 has lost 14%, with the biggest names, like Goldman Sachs, suffering even more. Shares in the bank dubbed 'the vampire squid' are down 25% over the same period, while Bank of America Merrill Lynch is 40% lower.
There seems to be little hope on the horizon for any immediate improvement, and this is likely to mean that bank stocks will underperform for some time to come.
Little change for US economic data
Weekly jobless claims data and trade gap figures provided little clues as to the improvement or otherwise of the US economy.
Initial claims for benefits last week were 404,000, only slightly better than the previous week's (upwardly revised) figure of 405,000.
Meanwhile, the US trade gap held close to its four-month low, at $45.8 billion, as exports remained near an all-time high. We still await real signs that the US economy is on a path to rude health, and until this occurs caution will persist.
Heavy falls for Renishaw and Mitchells & Butlers
Two UK companies saw their share prices take a definite turn for the worse this afternoon.
First to move was engineering firm Renishaw, which enjoyed such a good run into the end of 2010. In shares spread betting, the company dropped 14.5% to 880p, less than half their August peak of 1886p, following a profit warning. Renishaw said that first quarter pre-tax profit would be 10% lower than expected due to a slowdown in one of its electronics products, while it would also be reviewing the future of its healthcare division.
Shortly after Renishaw released its statement, pub firm Mitchells & Butlers was hit by news that it was no longer a bid target.
Majority shareholder Joe Lewis had bid on 12 September for the company, offering 230p per share. However, he has now withdrawn the offer, with M&B investors breathing a sigh of relief that their company would no longer fall prey to a low ball offer. M&B shares went from 250.7p to 217p, before rebounding to 237.3p, a drop of 6%.
Slovakia says 'yes'
It's always worth asking important questions more than once. After at first saying 'no' to the expansion of the eurozone rescue fund, the Slovak parliament has done as expected and ratified the plans.
A last-ditch attempt by eurosceptics to refer the decision to the national constitutional court failed. This means that all 17 members of the eurozone (well, their parliaments anyway) have approved the increase in the size of the fund, which in theory means that larger nations like Italy and Spain are at less risk of financial contagion.
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'Share Spread Betting: Renishaw Lower on Profit Warning', Article by IG Index, last update: 13-Oct-11
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