Wall Street Rebounds on Earnings, Bernanke Cautious on Outlook

Bikram Pandey
17 Jul, 2012
New York City

U.S. indexes rebounded from the morning losses and commodities closed higher. HSBC faces $1 billion fine for a decade long compliance failure at its U.S. unit. Goldman Sachs looks for other ways to bolster earnings after trading and risk-taking generate weak profits.

[R]4:00 PM New York – U.S. indexes rebounded from the morning losses and commodities closed higher. HSBC faces $1 billion fine for a decade long compliance failure at its U.S. unit. Goldman Sachs looks for other ways to bolster earnings after trading and risk-taking generate weak profits.[/R]

U.S. indexes advanced after consumer prices remained unchanged but industrial output rose in June. Market indexes drifted lower immediately after the Fed Chairman speech but climbed back to positive territory in the afternoon.

The Federal Reserve Chairman Ben Bernanke repeated his weak assessment of the U.S. economy at his semi-annual testimony in front of the U.S. lawmakers and said economic recovery is “modest” and jobs market is improving “frustratingly slow.”

Bernanke repeated that the U.S. economy will continue to expand at a “moderate” pace in coming quarters and said planned cuts in federal spending at the end of the year could push the economy back into recession. He fell short of announcing any new measures to improve economic growth or lower the record long term unemployment.

On the earnings front, Goldman Sachs quarterly net fell 12% to $927 million as the trading and securities house faced difficult market environment and regulators restrained the bank from taking more risks. Goldman plans to cut 100 positions from its 32,300 staff and increase its annual cost cutting beyond $1.9 billion.

The bank is betting less of its money and its average daily value at risk was $92 million in the second quarter, the lowest in last six years. Net revenues at the bank declined 9% and return on equity was 5.4%, significantly lower than more than 30% before the onset of financial crisis in 2008.

Johnson & Johnson second quarter net declined 49.3% to $1.41 billion and Mattel reported second quarter results ahead of expectations. State Street agreed to acquire hedge fund administration service unit from Goldman Sachs for $550 million.

Coca-Cola Company, the largest beverage maker in the world reported weak sales growth and flat earnings as rising costs of commodities hurt margins. Coca-Cola said revenues, operating income and volumes increased in every region except Europe. Volume in North America increased 1% and in Pacific region shot up 8%.

The European indexes traded higher and Spanish bond yields fell at the latest debt auction. Rating agency downgraded 13 Italian banks with negative outlook. The IMF approved €1.48 billion aid to Portugal. German confidence fell to 6-month low in July.

The UK indexes dropped after inflation eased and home prices rose. HSBC is facing as much as $1 billion in fines for violating anti-terrorism laws and facilitating money laundering at its Mexican unit and providing access to the U.S. financial system to drug cartels.

The bank is investigated by at least three U.S. regulators for a decade of compliance practices at its U.S. unit and the head of the compliance David Bagley told a U.S. Senate hearing he will step down. The bank is also investigated by the Department of Justice and Internal Revenue Service for its possible role in helping Americans evade taxes through HSBC India.

Bank of England Governor Mervyn A. King denied that the New York Fed gave warnings on rate fixing in a speech in front of a UK parliament committee.

King told a parliamentary committee that the New York Fed in 2008 did not suggest any illegal activities in reporting Libor rates.

In his appearance to the British parliamentary committee on Tuesday, King said discussions with the Fed officials in New York focused on how to improve the London interbank offered rate.

King said, “At no stage did he or anyone else at the New York Fed raise any concerns with the Bank that they had seen any wrongdoing.”

Timothy F. Geithner, then the head of the New York Fed and now the U.S. Treasury Secretary, sent an e-mail to Mr. King in June 2008 that suggested reforms to the Libor including recommendations that regulators “strengthen governance and establish credible reporting procedure” and eliminate “incentives to misreport.”

Tokyo financial markets closed higher after a 3-day weekend and the yen strengthened prompting another round of tough talks from the finance minister. The IMF lifted its growth outlook for Japan to 2.4% but lowered global economic views.

Australian indexes closed higher for the third day after the Reserve Bank of Australia highlighted the economic strength in its latest assessment. The dollar closed higher and investors shifted attention to the next meeting of the central bank on August 7.

Second largest iron ore miner based in Australia, Rio Tinto said first half iron production increased 4% after production recovered in the second quarter.

Commodities, Bonds and Currencies

The yield on 10-year bond traded lower to 1.50% and on 30-year bond increased to 2.59%.

The U.S. dollar inched lower to $1.227 to a euro and decreased against the Japanese yen to 79.09 yen.

Immediate delivery futures of Texas crude oil increased 57 cents to $89.05 a barrel and Brent crude gained 53 cents to $103.90, futures of natural gas fell 0.002 cents to $2.79 per mbtu and gasoline price decreased 1.02 cents to 284.41 cents a gallon.

In metals trading, copper decreased 2.35 cents to $3.46 per pound, gold decreased $5.40 at $1,586.20 per ounce and silver decreased 1 cent to $27.32.