U.S. Stocks Decline; Elevated Job Claims

123jump.com Staff
21 May, 2009
New York City

U.S. stocks declined in the morning on cautious views on the economy and elevated jobless claims. Regional banks declined after Regions Financial raised $1.6 billion in stock offering. UK debt worries dragged European markets lower.

[R]10:30 AM New York – U.S. stocks declined in the morning on cautious views on the economy and elevated jobless claims. Regional banks declined after Regions Financial raised $1.6 billion in stock offering. UK debt worries dragged European markets lower.[/R]

The U.S. stocks turned negative after jobless claims exceeded economists’ expectations, cautious comments from the former Fed chairman Greenspan and weak European markets.

The S&P 500 index and Dow Jones Industrial Average fell 1.8% and Nasdaq declined 1.6% after one hour of trading.

Stocks of regional banks declined after Regions Financial priced its 400 million shares offering at $4 a share. The 18% discount in price from yesterday’s closing dragged stocks of other regional banks. Huntington Bancshares Inc ((HBAN)) dropped 13% to $4.19 and Fifth Third Bancorp ((FITB)) dropped 10.4% to $6.91.

U.S. Jobless Claims Elevated

Seasonally adjusted initial claims of unemployment claims in the week ending May 16 declined 12,000 to 631,000 from the previous week. The claims were higher than expected by many economists. The largest increases in initial claims were in Michigan with 16,817 and North Carolina of 3,783 and the decreases were in California with 10,052 and Wisconsin of 1,691.

Former Fed chairman Greenspan suggested that commercial banking system is still underfunded and will need additional capital despites the results of the stress tests. In an interview in Washington, he stopped short of saying how much more capital will be needed and also highlighted that until the home prices stabilize the danger of “potential mortgage crisis” looms.

U.S. Linked World Economies Shrink More

World markets are increasingly turning volatile with the mounting evidence of larger economic shrinkages in the nations relying on exports to the U.S. In the latest economic estimates for the first quarter from Mexico, Japan, Germany and Singapore showed double digit declines.

Singapore is the latest to join other nations with exports linked to U.S. with sharper economic declines. The economy shrank at annual rate of 14.6% after falling at a rate of 16.4% in the fourth quarter. On Wednesday, Mexico reported fall in output by 21.5%, on Tuesday Japan said the economy contracted 15.2% and Germany last week reported a fall in output of 14.4%.

Rating agencies are finally catching up with the deterioration in wealthy nations’ finances. The shaky finances of UK forced at least one rating agency to fire a warning shot and the debts of the governments of U.S., Japan, Ireland, India and Australia are likely to balloon as well.

UK Public Finances Worries

European markets were cautious after the rating agency Standard & Poor’s reaffirmed UK’s debt rating at the highest level but lowered the outlook to negative. The government debt has surged with the recent increase in the Bank of England purchasing government debt to tune of 125 billion pounds and an increase in government guarantees to the bonds issued by the government.

The UK debt is likely to stay near 100% of its GDP creeping to the national debt levels of Greece, Italy and Japan.

In the current fiscal year ending in March 2010, the UK plans to sell 220 billion pounds and the government is likely to run a budget deficit of 175 billion pounds, nearly 12.4% of GDP. Separately, the Office of National Statistics said that the April budget deficit increased to 8.5 billion pounds, record high since the ONS maintained the statistics.

The U.S. federal debt is expected to surge above 80% in the current year and surpass 97% in 2010 and is estimated to stabilize at 100% thereafter. The IMF estimates that the EU-16 debt to reach 69% at the end of this year and UK debt may surge to near 95%.

The pound declined 0.7% against the euro and the U.S. dollar and the benchmark index FTSE 100 index dropped as much as 2.8%.