Wall Street pared some of its early gains this afternoon on lacklustre May retail sales, disappointing factory orders and increased signs of caution in the banking sector.
By 3.55pm (London time) the Dow Jones Industrial Average was trading at 10271.15, representing a 21.61 increase (+0.21%) from the prior day's close but 44 points off an earlier high.
In addition, the broader S+P 500 was 2.59 points (+0.24%) higher at 1100.97, while the Nasdaq 100 was 8.24 points (+0.44%) higher at 1887.83.
Internet retail giant Amazon saw its shares edge marginally lower to $126.21 this afternoon while Apple's shares struggled to break into positive territory after a retail sales report.
This was based on 28 retailers tracked by Thomson Reuters and revealed that sales at stores open at least a year rose by only 2.5%, this was shy of expectations of a rise to 2.6%.
'These results are disappointing, especially considering where the estimates have come down from since the earnings calls from retailers in the latter part of May,' said Brian Sozzi of Wall Street Strategies. [1]
Meanwhile, a separate report showed US-made factory goods increase by a seasonally adjusted 1.2% in April, led by a surge in orders for civilian airplanes and parts. However, when excluding transportation goods, orders unexpectedly declined 0.5%.
In addition, the Institute for Supply Management revealed that the US services sector, which makes up around 90% of the US economy, continued to expand, albeit at an unchanged rate last month.
The index of non-manufacturing businesses held steady at 55.4 for a third month, missing expectations for a rise to 55.6. The data we're seeing so far is good, but there's a sensation that things are now beginning to slow down.
On a more positive note, however, there were signs of improvement in the US labour market today. The number of Americans claiming first-time unemployment benefits fell 10,000 to a seasonally adjusted 453,000, in line with expectations.
Meanwhile, the ADP Employer Services report showed that private employers added 55,000 jobs in May, which was positive, but below Bloomberg's median estimates which pointed to a rise of 70,000.
In company news, BP's ADRs climbed 1.46% to $38.21 this afternoon, down from an earlier high of $38.9 after Moody's Investors Service and Fitch Ratings cut the company's credit rating on concerns that the cost of cleaning up the Gulf of Mexico oil spill will damage the company’s balance sheet.
Moody's cut BP’s senior unsecured rating by one notch from Aa1 to Aa2 today while Fitch lowered the energy major's long-term issuer default and senior unsecured ratings by one level from AA+ to AA.
Fitch also said that BP's rating may be cut again if the oil well flow rate continues to increase and the relief well currently being drilled fails to halt the leak 'in a timely fashion'. Clean-up costs exceeding Fitch's worst-case expectations of about $5 billion in any one year could also put pressure on the rating, it said. [2]
Banks were cautiously higher as well, with Citigroup up 1.5% to $3.98 and Bank of America 0.4% higher at $15.95. In contrast, JPMorgan Chase declined 0.60% to $39.33 after the Financial Services Authority said it fined the bank a record £33.32 million ($49 million) for failing to separate client money held by its futures and options business from the firm's own money between November 2001 and July 2009. Wells Fargo, American Express and Morgan Stanley were all lower this afternoon.
Meanwhile, I would like to point out that a report released from the ECB today seems to suggest that banks are expecting the situation in the Eurozone to deteriorate further.
Overnight deposits with the ECB rose to a record high yesterday, the central bank reported in a market notice today. Banks lodged €320.4 billion in the ECB's overnight deposit facility, up from a prior €316.4 billion. The report also said that deposits have exceeded €300 billion over the last five days.
'The banking crisis is back,' said Norbert Aul, an interest rate strategist at Commerzbank. 'The news flow over the past few weeks has spooked banks and since nobody knows how exposed individual financial institutions are, it's deemed safer to park cash with the ECB rather than lend it on.' [3]
The announcement is indeed concerning and reminiscent of the turbulent period we all passed through following the collapse of Lehman Brothers in September 2008. Certain investors may view this as a sign that things are about to heat up again. Perhaps we haven't seen the full wrath of the banking crisis yet.
At least we can now fully appreciate why governments were implementing stringent stress tests on banks last year. As far as I can remember major banks participating in the stress tests passed and those that didn't, I imagine, would have had to restructure or are too small to pose a threat.
Could this mean that banks are more prepared for shocks now and perhaps pose a lower level of systemic risk now than they did back then? If so, this could mean selective stock picking may remain a rewarding way to play the markets amidst a potential banking sector relapse.
The problem with this view is that we don't know how severe the situation could evolve to be. Banks will always remain an important component to the entire system, as PMICO's Mohamed El-Erani recently stated, meaning any shocks to the sector are still likely to be felt at a systemic level.
'Banks have a way of amplifying shocks in the system,' El-Erian said in an interview around a week and a half ago. Banks are 'like the oil in your car. They link up so many different parts. The minute you introduce strains in the banking system, there’s always a fear that governments will be behind the curve and that you can get contagion', which would lead to 'widespread disruption'. [4]
Source: [1][2][3] Bloomberg News (3 June 2010), [4] Bloomberg News (25 May 2010)
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'Spread Betting News 3 Jun 2010', Article by IG Index, last update: 3-Jun-10
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