Dow Jones Newswires-Wall Street Journal | Financial stocks turned higher Friday as some uncertainty was removed
with the U.S. Senate’s passage of its version of a financial-overhaul
bill, though investors are still concerned about what the final bill
will include and continue to grapple with ongoing fears about the debt
crisis in Europe.
Investors have been in limbo for months, wondering what provisions will
be in the final law. The Senate still needs to reconcile its bill with
the one passed by the House in December. But the Senate’s passage of its
measure does offer a little more clarity because its bill had undergone
a multitude of changes and amendments while it was up for debate.
A lot of the uncertainty is over, which should give the stocks some immediate relief, First American Funds analyst Alan Villalon said, but investors are still wondering about some pieces of the legislation, including the parts on derivatives, capital requirements and the Volcker rule, which would curb lucrative proprietary trading practice at most banks. The Senate’s version of the bill also contains a contentious provision that would require banks to spin off their derivatives-trading businesses.
There is “a lot of concern” about how much time the banks are going to have to spend implementing the changes under the financial regulations as opposed to time spent focusing on a recovery, he said.
The financial sector of the Standard & Poor’s 500 was recently the best-performing sector, up 1.6 percent.
Morgan Stanley led gainers among the big banks, rising 3.7 percent to $26.60, while Goldman Sachs Group Inc. climbed 3.5 percent to $140.91, J.P. Morgan Chase & Co. rose 3.3 percent to $39.08, Citigroup Inc. gained 1.9 percent to $3.70 and Bank of America Corp. increased 1.7 percent to $15.55.
“People are hopeful that some of the harshest things…are actually softened in the reconciliation process” with the House, Morningstar analyst Matthew Warren said. But that won’t be clear for another month or so, he said, and uncertainty is going to remain and continue to weigh on the stocks as different elements get added and subtracted to the legislation.
In addition to the still-fuzzy outlook for new financial-system regulations, the precarious fiscal condition of several European countries has also weighed on financial stocks. Economists have worried about government defaults on debt in countries such as Greece, Portugal and Spain, and investors continue to be unsure which U.S. banks, if any, could suffer losses from troubles in Europe. Bank of America and J.P. Morgan Chase each reported holding less than $2 billion in exposure to Greece as of March 31, which J.P. Morgan called “modest.”
Investors are worried about the euro-zone news because the recovery in the U.S. is very sensitive, and a major crisis there could cause the U.S. to double dip into another recession, Villalon said. And the fact that U.S. banks will be busy restructuring under new financial regulations makes it more difficult for them to separate themselves from Europe, which they need to do to keep the U.S. recovery going, he said.
The Senate’s passage of the reform bill has some clear negatives for ratings agencies Moody’s Corp. and McGraw-Hill’s Standard & Poor’s, but no provisions are “terminally threatening to the economics of the industry,” Piper Jaffray said. “Resolution of regulatory uncertainty should ultimately serve as a catalyst to higher multiples on the shares of [Moody's] and [McGraw-Hill] as we are better able to quantify the cost associated with regulatory reform,” the firm said. Lowering the threshold for legal liability is one of the biggest negatives, but the firm said even that is “not a ‘game changer’.”
Moody’s was recently up 2.3% to $21.69, while McGraw-Hill edged up 0.8% to $28.28.
Meanwhile, Janney Capital Markets upgraded MasterCard Inc. to buy from neutral, saying the shares will benefit from multiple expansion as investor sentiment begins to improve after the Senate passed its bill. MasterCard and other credit-card stocks had rallied Thursday as well after the failure of a proposal that would have allowed individual states to impose interest-rate caps on cards. MasterCard and Visa Inc., the card network companies, rose 3.8% to $213.33 and 3.3% to $75.25, respectively, while card issuers Discover Financial Services rose 1.7% to $13.26, American Express Co. edged up 0.3% to $38.73 and Capital One Financial Corp. was up a penny at $41.34.
