S&P 500 Index at 2-month High; European Banks in Another Downgrade

Bikram Pandey
14 Oct, 2011
New York City

U.S. indexes extended gains and completed third weekly rise. Crude oil, copper and gold gained. European banks faced another round downgrade after a rating agency lowered its views on French banks. G20 finance officials struggle to convince European leaders to accelerate bank recapitalization plan.

[R]4:00 PM New York – U.S. indexes extended gains and completed third weekly rise. Crude oil, copper and gold gained. European banks faced another round downgrade after a rating agency lowered its views on French banks. G20 finance officials struggle to convince European leaders to accelerate bank recapitalization plan.[/R]

Markets in New York and Europe gained and in Asia struggled as G20 finance ministers and central bankers meet in Paris. The meeting is expected to accelerate the plan to bolster European banking recapitalization and reforms and also halt the growing debt contagion from spreading further.

Global banks were under more scrutiny today as rating agencies lowered their views on French banks.

Standard & Poor’s lowered its credit rating on the largest French bank, BNP Paribas and issued negative outlook for five largest banks in France. In the case of BNP Paribas, the rating agency cited “material” exposure to Italy and said that top five banks are suffering weak financial conditions in the face of weakening markets conditions in the near future.

Separately, the Fitch rating agency said it will review different debt ratings of Societe Generale, BNP Paribas, Credit Suisse, Deutsche Bank and Barclays.

At the heart of the banking crisis in Europe, banks have too much exposure to peripheral nations’ debt and too little capital to withstand any fallout from the weak economies of Spain, Italy, Portugal, Ireland and Greece.

European Banking Authority is demanding that banks increase their tier one capital ratio to 9% from the current 6% and also mark to market the sovereign bonds held in their portfolios.

Banks are reluctant to curtail profitable lending and are worried that marking assets to market will only lower values of their stocks and make it equally harder to raise new capital. Banks are also not prepared to accept capital from the national governments.

France is also weary of offering support its banks because too much support without adequate guarantees could harm its AAA rating. France is especially vulnerable as the architect of the euro with Germany and wants national banks to raise capital from private investors or the European Central Bank or the recently formed EFSF.

On Thursday, Spain’s rating was lowered for the third time in three years by Fitch. The rating agency also cited weak economic conditions and fiscal and external environment but highlighted weak climate to raise national income.

Bank of International Settlements in March said that European banks collectively hold $2.2 trillion of sovereign debts of Spain, Italy, Ireland, Portugal and Greece.

In trading today, U.S. stocks extended gains and the recent rally in place since October 4 lifted the S&P 500 index by 15%. The index is still caught in a narrow trading range and extended gains today by 1.5%.

For the week, the S&P 500 index increased 5.5% and the Nasdaq soared 7.3%.

In the earnings news, Google third quarter net income increased 30% to $2.73 billion. Mattel third quarter net income rose to $300.8 million. Valmont third quarter net earnings soared 53% to $42.1 million. J.B. Hunt Transport Services quarterly net increased 6%.

European markets advanced as G20 leaders urge European leaders to expedite the bank recapitalization plan. Italian Prime Minister Silvio Berlusconi won a confidence vote but the nation is expected to head for early election as early as next March, one year earlier than the schedule.

Stocks in Japan declined as more companies curtail production as Bangkok industrial area suffer one of the worst flood damages in the recent years. Toyota Motor extended production halts at three factories in Thailand. Olympus fired its British born chief executive.

Australian indexes declined nearly 1% and caught in a trading range in the last two days after a 3-day rally. Banks were lower on the global banking system worries. Qantas faces more flight disruptions after engineers prepare to walk out tomorrow.

Commodities, Bonds and Currencies

The yield on 10-year U.S. bond closed up to 2.23% and 30-year bond increased to 3.21%.

The U.S. dollar decreased to $1.3876 to one euro and closed higher against the Japanese yen to 77.27 yen.

Immediate delivery futures of Texas crude oil increased $3.07 to $87.30 a barrel and futures of natural gas increased 0.16 cents to $3.69 per mbtu and gasoline price increased 7.8 cents to 283.60 cents a gallon.

In metals trading, copper increased 10.15 cents to $3.40 per pound, gold increased $13.60 to $1,682.10 per ounce and silver increased $0.56 to $32.22.