U.S. Markets Wrap: Stocks Drop Following Late-Day Bank Slump

U.S. Markets Wrap: Stocks Drop Following Late-Day Bank Slump

April 22 (Bloomberg) -- U.S. stocks retreated for the second time this week as concern that government stress tests will reveal weakness in banks snuffed out an early rally spurred by an unexpected improvement in housing prices.

Morgan Stanley, the fifth-biggest bank by assets, tumbled 9 percent after posting a wider-than-estimated loss, while KeyCorp tumbled 13 percent after BMO Capital Markets said credit problems are spreading. Wells Fargo & Co. fell 3.4 percent, erasing an earlier rally of 9.3 percent, after Chief Financial Officer Howard Atkins said “credit may not have turned yet.”

The Standard & Poor’s 500 Index lost 0.8 percent to 843.55, erasing a rally of 1.4 percent in the final 45 minutes of trading. The Dow Jones Industrial Average declined 82.99 points, or 1 percent, to 7,886.57, reversing an earlier 75-point gain.

“It was just a roller coaster,” said Frank Ingarra, the Stamford, Connecticut-based manager of the $160 million Hennessy Focus 30 Fund that beat 98 percent of its peers in the past five years. “People are uncomfortable holding the financials for the whole day. The financials just fell out of bed.”

The market’s earlier advance came after AT&T Inc. posted better-than-estimated earnings, General Electric Co. reiterated its projection that its finance unit will be profitable and a gauge of home prices unexpectedly increased 0.7 percent in February from January, the first consecutive monthly gain in two years.

Gains Erased

The rally was reversed as concern grew that government stress tests will undermine confidence in banks. The Obama administration may direct banks that are judged to be short of capital to disclose how they are going to get additional funds when the government reveals the results on May 4, according to a person familiar with the matter.

Should the U.S. unemployment rate rise to 12 percent from its current 25-year high of 8.5 percent, then most banks will need to raise more capital, Paul Miller, an analyst at Friedman Billings Ramsey Group Inc., said in a Bloomberg Television interview.

“The higher we go the worse off these banks are going to be,” Miller said during a Bloomberg Television interview today.

Morgan Stanley fell $2.21 to $22.44. The bank reported a loss of 57 cents a share, wider than the 8-cent deficit estimated by analysts as real-estate and debt-related writedowns overwhelmed trading gains. The company also cut its dividend to 5 cents a share from 27 cents.

KeyCorp, Wells Fargo

KeyCorp fell 90 cents to $6.15, the biggest decline in the S&P 500, after BMO Capital Markets downgraded Ohio’s second- largest bank to “market perform” from “outperform,” saying the company’s “problem assets are spreading to other loan portfolios.”

Wells Fargo & Co. dropped 63 cents to $18.18. Atkins said in an interview on CNBC that he doesn’t know what the U.S. may say in their stress tests and told Bloomberg Television that “I don’t want to say we’re out of the woods yet.” The second- biggest U.S. bank by market value rallied earlier after saying first-quarter profit rose 53 percent as borrowers rushed to refinance mortgages.

The S&P 500 Financials Index of 80 banks, insurers and investment firms closed down 3.8 percent after rising as much as 2.2 percent. The gauge is still up 68 percent from a 17-year low reached March 6.

Fed Purchases

Treasury 10-year yields touched the highest since the day the Federal Reserve said it would buy U.S. debt after a gauge of home prices unexpectedly improved, adding to signs the worst of the recession may be over.

The benchmark 10-year note yield reached 2.97 percent, the most since March 18, after U.S. home prices rose 0.7 percent in February from the previous month, when they gained a revised 1 percent, the Federal Housing Finance Agency said. Notes pared losses as stocks fell on a late-day retreat in financials.

“The data is indicating we are in the bottoming process,” said Paul McCulley, a partner and fund manager at Pacific Investment Management Co. in Newport Beach, California, in a Bloomberg Television interview. “The rate of decline is slowing.”

The yield on the benchmark 10-year note rose four basis points, or 0.04 percentage point, to 2.94 percent at 4:45 p.m. in New York, according to BGCantor Market Data. The 2.75 percent security due in February 2019 fell 10/32, or $3.13 per $1,000 face amount, to 98 11/32. The yield touched 3.02 percent on March 18.

Japanese Exports

The yen rose against the dollar and euro after a report showed a slump in Japan’s exports slowed in March, adding to signs the worst of the recession may be over.

The pound fell against all of the other major currencies as Chancellor of the Exchequer Alistair Darling said the U.K. will borrow 269 billion pounds ($392 billion) more than previously forecast and increase income taxes as the worst slump since World War II saps revenue. The Australian dollar weakened against the greenback as annual inflation slowed, giving the central bank more room to lower interest rates.

“The focus was on yen outperformance,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. “The downward spiral of trade starts to abate here.”

The yen advanced 0.7 percent to 98.02 per dollar at 4 p.m. in New York, from 98.73 yesterday. The yen gained 0.3 percent to 127.39 per euro from 127.81 yesterday, when it reached 126.09, the strongest level since March 16. The dollar depreciated 0.4 percent to $1.2996 per euro from $1.2948. It earlier climbed to $1.2886, the strongest level since March 16.

Gold and silver advanced on rising demand for a store of value after the International Monetary Fund projected the global economy to contract this year.

1.3% Contraction

The IMF forecast a 1.3 percent decline in the world economy, compared with a 0.5 percent expansion estimated in January, and said growth will be slower next year than previously expected. Some investors buy precious metals as a safe harbor in times of economic turmoil.

“What is supporting gold is the continued uncertainty in the global economy,” John Gross, the president of J-E Gross & Co., a metals-industry consulting company in Cranston, Rhode Island, said in an e-mailed comment. “We are in the midst of a ‘sea change’ where gold is the safe haven for investors.”

Gold futures for June delivery gained $9.80, or 1.1 percent, to $892.50 an ounce on the New York Mercantile Exchange’s Comex division and was headed for a weekly gain. Last week, the most-active contract slid 1.7 percent, the fourth- straight drop and the longest losing stretch since August.

IMF Projection

Silver futures for May delivery jumped 24.5 cents, or 2 percent, to $12.305 an ounce on Comex. The price has tumbled 31 percent in the past year, while gold is down 3.5 percent.

The IMF projected growth of 1.9 percent next year, down from 3 percent estimated in January.

Copper prices fell, capping the steepest three-day decline since January, on speculation that the recession will deepen and cut raw-materials demand.

A global surplus of refined copper will widen through at least 2010 as use drops “significantly,” the International Copper Study Group said yesterday in a report.

“The major reason that copper is falling is that people are just worried about the economy,” said Patrick Chidley, an analyst at Barnard Jacobs Mellet LLC in Stamford, Connecticut.

Copper futures for July delivery dropped 1.95 cents, or 0.9 percent, to $2.0605 a pound on the Comex division of the New York Mercantile Exchange. That marks a drop of 6.2 percent, the most in three-straight declining sessions since Jan. 22.

“Demand may not be as strong as some people had thought,” said Michael Gross, a trader at OptionSellers.com in Tampa, Florida. “This market still has some room to correct.”

Copper still has surged 46 percent this year on speculation that government spending will revive growth and spur demand. The price also has risen as a shortage of scrap copper in China, the world’s biggest metals buyer, boosted imports.