A week dominated by fears of slowing European and global growth quickly shifted focus to the banks at the heart of Wall Street, as JPMorgan Chase declared a $2bn trading loss on credit derivatives on Thursday.
Market watchers were caught off-guard by the announcement from Jamie Dimon, the bank’s chief executive, who warned the unexpected losses “could get worse”. Concerns about excessive risk-taking by financial institutions – one of the causes of the global financial crisis – re-entered markets and hit shares in the major US banks.
The S&P 500 financials index finished down 1.8 per cent for the week. The KBW Bank Index, a closely watched measure of US banks, was 1.7 per cent lower.
Shares in JPMorgan Chase dropped sharply on Friday and were 11.5 per cent lower on the week to $36.96.
Glenn Schorr, analyst at Nomura, said: “What really hurts is the negative impact on JPMorgan’s reputational premium that is likely to hit the stock.”
Mr Schorr added that the JPMorgan losses also made it likely that Moody’s, the credit rating agency, would become more steadfast in its deteriorated views of the banking industry. Moody’s warned earlier in the week that the tendency for global banks to dodge new capital requirement rules while amassing debt would affect the institutions’ creditworthiness.
Morgan Stanley lost 6.6 per cent to $14.95 for the week, Citigroup was off 7.1 per cent to $29.35 and Bank of America declined 2.5 per cent to $7.55. Goldman Sachs shed 6.3 per cent to $102.12.
Wells Fargo was the only big US bank in positive territory for the week, up 0.9 per cent to $33.31.
JJ Kinahan, chief derivatives strategist at TD Ameritrade, said: “The JPMorgan situation, although not good for the company itself, seems to be a limited situation to that name.”
He added: “The fact that they came out in a straightforward manner to Wall Street has helped to limit damage. As expected, all financial stocks are lower and I am sure they are all reviewing their trading policies and control.”
Overall, the S&P 500 declined 1.2 per cent to 1,353.39 in the five-day trading week. The benchmark US index has lost 3.2 per cent this month, but is up 7.6 per cent for the year to date.
Volatility, as measured by the Chicago Board Options Exchange’s Vix Index, fluctuated throughout the week. The Vix, informally known as Wall Street’s “fear gauge”, rose as much as 12.5 per cent to rise above 20 for the first time in May. The Vix eventually settled at 19.81, up 3.8 per cent.
The Dow Jones Industrial Average moved 1.7 per cent lower this week to 12,820.60. The Nasdaq Composite Index lost 0.8 per cent to 2,933.82.
Cisco, a bellwether for global growth, lost more than 13 per cent to $16.51 for the week as the maker of internet and communications equipment said customers were holding back purchases due to global macro uncertainty.
The week’s worst performing stock was Fossil, the watchmaker and clothing designer, which sounded a warning bell in its first-quarter results that its sales in Europe had slowed in late March.
Shares in Fossil dropped about 39 per cent and closed at $78.55, with its losses reverberating across US retailers with significant European business.
Barry Knapp, chief equity strategist at Barclays, said: “European growth concerns have re-emerged as a source of risk for US equity investors following weak April purchasing mangers’ index surveys and escalated political concerns.”
He added: “This hit home on Tuesday as Fossil, a darling of growth-oriented consumer discretionary investors, fell 37 per cent after missing earnings, attributing some of the shortfall to Europe.”
The S&P 500 consumer discretionary index fell 1.5 per cent and is down nearly 3 per cent in May. Macy’s, the department store group, disappointed analysts’ when it said full-year profit forecasts would stay at current levels. Shares in the company, which also owns the Bloomingdale’s chain, declined 7.6 per cent to $37.98.
Disney, the world’s largest entertainment group by revenues, said that it managed to beat analysts’ forecasts for the second quarter of its financial year despite a $200m writedown due to a failed film release in the period. Shares in the company, whose recent film The Avengers has shattered box office records over the past week and a half, rose 6.1 per cent to $45.56.
Yahoo, the internet search and media company, continued to deal with pressure from investors on its recently hired chief executive Scott Thompson. Shares in Yahoo rose 0.3 per cent to $15.19.