The markets ended the day posting large losses on Thursday, after the major averages continued to slide through the trading day. The S&P 500 lost 2.23%, the Dow Jones Industrial Average slipped 1.96%, and the Nasdaq dropped 2.44%.
Europe
The sentiment in Europe was rather mixed yesterday. The German DAX-30 fell 0.77%, the Spanish IBEX-35 fell 0.33%, while the Italian MIB managed to squeeze out a small profit of 0.14%.
The European Central Bank said that it will relax some of its rules for the acceptance of collateral. The central bank now accepts BBB minus rated mortgage backed securities as collateral in exchange for ECB funds. The move is widely seen as support for the Spanish banking sector, which has seen difficulties is obtaining financing. The private credit markets are closed and a major portion of their asset base no longer qualifies for use as collateral as a result of a string of rating downgrades.
On a separate note, two independent reports that estimate the additional capital requirements for the Spanish banking sector, were published yesterday. Consulting firms Oliver Wyman and Roland Berger estimated that Spanish banks would need between 52 billion euro and 62 billion euro in the "adverse" scenario in which the Spanish economy would contract by 6.5% in three years and home prices would fall 60% from the peak. The financial markets are pricing in an ever worse scenario, with traders expecting Spain to ask for a full-package bailout of a 100 billion euro.
There was some bad news from the macro-economic front. An index measuring the European manufacturing activity fell from 45.1 to 44.8 points in the month of May. There was one positive point in the report, the service component of the index rose by 0.1 points to 46.8. Both numbers came in significantly below the 50 point mark, indicating a contraction in economic activity.
Wall Street Opening
The U.S. markets opened around flat, but gave away ground steadily during the trading day, ending up on lows for the day. There was no sense of panic, yet bad news continued to hit the markets. Initial jobless claims rose another 2,000 to 387,000 last week. Furthermore, the Philadelphia's factory index dropped to -16.6 in June, the lowest level in almost a year. Stocks continued to fall as traders took profits in anticipation of the Spanish bailout last weekend. In the final hour of trading, stocks remained under pressure as rumors of an imminent downgrade from rating agency Moody's for large parts of the global banking sector hit the market .
One hour after the close, rating agency Moody's did indeed lower the credit ratings for large global banks. Morgan Stanley (MS) got a two notch downgrade, while the market was fearing for a three notch downgrade. Shares rallied up to 4% in after market trading. In total 15 banks received a downgrade, including Bank of America (BAC), JPMorgan Chase (JPM) and Goldman Sachs (GS), which all received a one notch downgrade. Worst hit was Credit Suisse (CS) which got a three notch downgrade from Moody's. Last week, the Central Bank of Switzerland had urged the bank to boost its capital levels.
Corporate News
Onyx Pharmaceuticals (ONXX), a biopharmaceutical company developing therapies that target the molecular mechanisms which cause cancer, rose 43% today to almost $64 per share. The company announced that the US Food and Drug Administration (FDA) made a favorable ruling for the company's "Kyprolis" treatment. Shares rallied 45% so far this year, now trading at all time highs.
Morgan Stanley (MS), the hard hit investment bank, rose more than 3.5% in after hours trading after rating agency Moody's downgraded the firm's credit rating by two notches, while the market had been anticipating a three notch downgrade. Despite the downgrade, both equity and credit investors were enthusiastic, as credit default swaps on its debt narrowed significantly after the announcement. The bank is now rated as Baa1 down from an A2 rating. Shares have fallen some 35% since the highs of March amidst worries about the economic slowdown, the impact of the loss at JP Morgan on the wider banking industry and this widely expected downgrade from Moody's - which forces the bank to post billions more as collateral for its over-the-counter trades.
Bed Bath & Beyond (BBBY) saw a massive 17% correction in its share price yesterday, after the company reported its first quarter earnings on Wednesday after the close. Revenues for the first quarter came in below expectations, so did its earnings forecast for the second quarter. Bed Bath & Beyond expects second quarter earnings between $0.97 and $1.03 per share, far below analysts consensus of $1.08. Investors were expecting the company to top analysts forecasts and issue a strong outlook. Over the last month, the company announced two acquisitions. It bought CostPlus for $550 million and Linen Holdings for $105 million. Those deals were seen as a act of strength by investors at the time.
ConAgra Foods (CAG), the food company rose about 2.7% in yesterday's trading session. The maker of Slim Jim meat sticks reported a fourth quarter loss on the back of a change in the accounting methods for its pension plans. The company reported a net loss of $86 million, or $0.21 per share. Excluding the accounting charges, earnings came in at $0.51 per share compared to $0.47 last year. Shares in ConAgra Foods have fallen 4% year to date, after the company made a string of acquisitions. ConAgra acquired Kangaroo Brands, Odom's Tennessee Pride and Del Monte Canada in recent months for a total consideration of approximately $300 million.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
