Stocks End Lower on Eurozone Downgrades
By Andrea Tse - 01/13/12 - 5:54 PM EST
Updated with S&P announcement of downgrades in Europe
NEW YORK (TheStreet
) -- U.S. stocks finished Friday in negative territory on fears of a downgrade -- realized after the bell -- of eurozone ratings by Standard & Poor's.
After the market close, Standard & Poor's officially stripped France and Austria of their triple-A credit ratings, along with seven other euro area members. France and Austria are now rated double-A-plus. Portugal, Italy, Spain and Cyprus had their ratings cut by two notches, while Germany was spared from the mass downgrade. The move came after news reports speculated for much of the session that Standard & Poor's would announce the downgrades.
The three major averages bounced off the lows of Friday's session, although losses in financial stocks kept the broader market in negative territory. The Dow Jones Industrial Average
lost 49 points, or 0.4%, at 12,422. Bank of America
and JPMorgan Chase
were the Dow's biggest losers, while Chevron
led the gains.
The S&P 500
was down 6.4 points, or 0.5%, at 1289. The Nasdaq
fell 14 points, or 0.5%, at 2711.
Investors have long anticipated that downgrades of European sovereign credit might be coming. Standard & Poor's put 15 of 17 eurozone countries on watch for a possible downgrade in December. Economists say that a downgrade of France would indirectly affect the credibility of Europe's bailout fund, which is backed by several countries in the region. Investors also think that Spain and Italy might be downgraded, said Brian Gendreau, market strategist with Cetera Financial Group, adding that in response to the morning's news investors are fleeing to the safety of U.S. Treasuries.
The benchmark 10-year Treasury rose 19/32, causing its yield to fall to 1.862%. The euro was getting pressured on the news, dropping 1.1% against the dollar.
"Some say that the downgrades are already priced into the market, but people said this as well during the U.S. downgrade and look what happened," noted Gendreau. "It's different when something probable becomes reality."
"I don't like the setup into earnings season, and this S&P news is just adding more instability," said James "Rev Shark" DePorre, founder and CEO of Shark Asset Management.
Shares of JPMorgan Chase lost 2.5% to $35.92 after the company kicked off earnings for major U.S. banks on a downbeat note. The banking giant's net income declined 23% in the fourth quarter, as persistent weakness in trading and capital markets revenues, offset strength in loan growth. Fourth-quarter earnings came in at $3.7 billion, or 90 cents a share,
about in line with estimates. However, revenue at $22.2 billion was down 17% from a year earlier and missed expectations for $22.99 billion, according to Thomson Reuters
"Yet another drop in revenue in JPMorgan inevitably means that next week's bank earnings will be even worse and ultimately lead to severe declines in bank stocks," says SICA Wealth Management manager Jeff Sica. "Banks will be the worst performing sector of next year, as I correctly predicted last year. Banks will begin to give investors a greater insight into their fatally flawed business models."
European equities gave up earlier gains. Germany's DAX closed down 0.58% while London's FTSE shed 0.46%. Overnight, Japan's Nikkei Average settled 1.36% higher, and Hong Kong's Hang Seng was up 0.57%.
Earlier, the Italian government sold 3 billion euros of bonds maturing in 2014 at a yield of 4.83%, down from 5.62% at a similar auction in the past. Borrowing costs also fell on Thursday when Spain was able to sell twice the amount of bonds that it had planned, signaling that investor demand for its sovereign debt remains robust. Auctions in Italy on the whole have been comparatively softer.
A spate of lackluster economic news out of the U.S. was largely overshadowed by speculations about downgrades in the eurozone. Before the opening bell, the Commerce Department reported that the trade gap widened to $47.75 billion in November from $43.27 billion in October. Economists forecast a deficit of $45 billion, according to a poll by Thomson Reuters.
Import prices fell 0.1% in December, in line with estimates, after rising a revised 0.8% in November. Export prices dropped 0.5% compared to the 0.1% rise forecast.
The University of Michigan reported that its consumer sentiment index rose to a reading of 74 in January from 69.9 in the prior month, topping the 71.5 forecast by economists.
In other corporate news, Novartis
, the Swiss drug maker, will cut almost 2,000 jobs in the U.S. this year because of the parent expiry of its best-selling hypertension drug Diovan. Novartis said Friday the job cuts also were necessary because of the failure of a clinical study into Tekturna, another hypertension drug. The company said it would record a first-quarter charge of $160 million. Novartis said the job cuts would save $450 million a year from 2013. Shares were down 1.6% to $55.80.
Bank of America
informed the Federal Reserve last year that it is willing to cease operations in some parts of the country if its financial problems worsen, The Wall Street Journal
reported, citing anonymous sources. The retreat was just one option on a list of emergency scenarios America's second-largest lender by assets submitted to the Federal Reserve, the Journal
reported. No scale back of operations is imminent, people close to Bank of America told the newspaper. Bank of America shares fell 2.7% to $6.61.
, US Airways
and private-equity group TPG are separately considering making bids for AMR
, the bankrupt parent of American Airlines, according to published reports. Delta has hired Blackstone as its financial adviser to assess a bid for American Airlines, a source told Reuters
. TPG is looking for a strategic partner with ties to the airline industry to launch a bid, according to The Wall Street Journal
. Shares were off 0.2% to $8.85.
The Justice Department may get involved in a Securities and Exchange Commission
investigation of Diamond Foods'
payments to walnut growers. According to The Wall Street Journal
, federal prosecutors are looking into potential criminal fraud
in the company's financial practices. The news could potentially threaten Diamond Foods' deal with Procter & Gamble
to acquire the Pringles brand of potato chips. Shares of Diamond Foods plunged 10.3% to $29.73.
February oil futures fell 40 cents to close at $98.70 a barrel. In other commodities, February gold futures lost $16.90 to settle at $1,630.80 an ounce as investors took profits and a stronger U.S. dollar hampered buying. The dollar index was up 0.9%.
-- Written by Andrea Tse and Chao Deng in New York
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