ECONOMIC INDICATORS

U.S. stocks rise as banks rally after Moody’s downgrades

BLOOMBERG FILE PHOTO/TIM BOYLE
U.S. STOCKS ROSE, after yesterday’s selloff, as the downgrade of global banks by Moody’s Investors Service was followed by rallies in financial shares.
Posted 6/21/12

NEW YORK - U.S. stocks rose, after yesterday’s selloff, as the downgrade of global banks by Moody’s Investors Service was followed by rallies in financial shares while the European Central Bank announced changes to its lending program.

Morgan Stanley added 1 percent after the ratings firm cut the bank by two levels rather than a threatened three grades. Bank of America Corp. and Citigroup Inc., which were lowered to within two levels of junk, each rose 1.2 percent.

The Standard & Poor’s 500 Index added 0.3 percent to 1,329.72 at 9:48 a.m. New York time. The benchmark gauge tumbled 2.2 percent yesterday for the second-biggest loss this year. The Dow Jones Industrial Average rose 55.75 points, or 0.4 percent, to 12,629.32. Trading in S&P 500 companies was down 7.4 percent from the 30-day average at this time of day.

“The bad news is out and it was not as bad as expected,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida. His firm oversees $350 billion. “They had been telegraphing the downgrades for a long time. That was the best telegraphed secret I’ve seen on Wall Street in 20 years. Why does anybody pay any attention to those rating companies? They missed it during the financial crisis.”

None of the financial firms was cut more than Moody’s had forecast. Morgan Stanley’s long-term senior unsecured debt rating was reduced two grades to Baa1. The downgrades left Citigroup and Charlotte, North Carolina-based Bank of America as the lowest-rated banks among the 15 at Baa2.

Fragile confidence

The prospect of downgrades had weighed on banks since Moody’s said Feb. 15 it was reviewing 17 banks with capital- markets operations because of fragile confidence and tighter regulations that pinched revenue. Pressure mounted as Europe’s sovereign-debt crisis intensified.

The reductions by Moody’s are “a mea culpa from 2007 and 2008,” said James Leonard, a credit analyst at Morningstar Inc. “The banks have gotten so much better in the last few years in terms of capital, yet their ratings keep going down. What does that tell you? That the ratings were so wrong before.”

Moody’s downgrade of 15 global banks could present a “buying opportunity” for stocks including Morgan Stanley, said Paul Miller, an analyst at FBR Capital Markets. The downgrades should have happened earlier, Miller, a former examiner for the Federal Reserve Bank of Philadelphia, said today in an interview on Bloomberg Television.

Financial companies rallied. Morgan Stanley, the world’s largest brokerage, added 1 percent to $14.10. Bank of America increased 1.2 percent to $7.91. Citigroup gained 1.2 percent to $28.17. JPMorgan Chase & Co. jumped 2.2 percent to $36.28.

Facebook gains

Facebook Inc. added 1.7 percent to $32.38. The company was rated buy in new coverage at Nomura Holdings Inc. The firm has a share-price estimate of $40.

Monster Beverage Corp. climbed 1.1 percent to $75.58. The distributor of energy drinks and fruit juices will replace Sara Lee Corp. in the S&P 500.

Equities tumbled yesterday, while commodities entered a bear market, after signals of a global slowdown in manufacturing added to disappointing housing and labor market data at the world’s largest economy. The reports came out a day after the Federal Reserve lowered its growth and employment estimates while signaling it may add to its record stimulus.

Investors also watched news out of Europe. The ECB said it decided this week to relax some rules on the collateral that banks can offer in exchange for central bank funds. Spanish policy makers are considering forcing investors who hold equity and junior debt in banks to absorb losses in a restructuring, according to a person with knowledge of the plan. German business confidence fell to the lowest in more than two years in June.

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