Stocks at the Mercy of Eurozone, US Debt Talks

By Frank Yu
Frank Yu
Frank Yu
July 17, 2011 Updated: October 1, 2015

POSITIVE RETURNS: Citibank CEO Vikram Pandit (R) speaks at the official opening of Citibank's new flagship branch at Union Square on Dec. 16, 2010, in New York City. (Mario Tama/Getty Images)
POSITIVE RETURNS: Citibank CEO Vikram Pandit (R) speaks at the official opening of Citibank's new flagship branch at Union Square on Dec. 16, 2010, in New York City. (Mario Tama/Getty Images)
NEW YORK—The U.S. stock market could be heading into a critical juncture this week as stocks could be hard pressed to halt their recent losing streak unless investors see progress in the political jousting in Washington as the U.S. debt ceiling deadline approaches.

Stocks closed the week higher last Friday, but fell as a whole last week. The Dow Jones Industrial Average rose 0.3 percent last Friday, rising 42.6 points, but fell by 177 points, or 1.4 percent, on the week. The broader S&P 500 Index dropped 2.1 percent last week, while the Nasdaq Composite Index fell almost 2.5 percent.

Facing further deterioration in European sovereign debt, investors this week could be looking to sell stocks—and other risky assets—and pour their funds into cash or commodities, if no significant progress could be made in the talks to raise the U.S.’s debt ceiling.

It is widely believed that if a deal to raise the nation’s $14.3 trillion limit could not be reached by Aug. 2, the United States could default on its debt, making borrowing money harder for U.S. governments, businesses, and consumers, as well as a possible default on Social Security payments.

Although no significant progress has been made on the debt front, the Democrat-controlled White House and Senate and the Republican-controlled House of Representatives have vowed to continue working toward a resolution despite the public acrimony.

Senate leaders from both parties are hammering out a deal put forward originally by Senate Minority Leader Mitch McConnell, which would allow President Obama to raise the debt limit without congressional approval.

In Sunday’s “Meet The Press” on NBC, Republican Sen. Jim DeMint declared that “a day of reckoning is going to come,” adding that the country must agree to spending cuts and Congress should pass a balanced budget amendment to the Constitution. Sen. Dick Durbin (D-Ill.) said on the same program that such an amendment would not pass the Democrat-controlled Senate.

Stocks Up on Citi, Clorox

Last week banking giant Citigroup Inc. reported second-quarter earnings that exceeded analyst expectations. The New York-based bank said that Q2 earnings were 24 percent higher than the same quarter last year, on strong international revenues and smaller loan losses.

The nation’s third largest bank reported earnings of $3 billion last quarter, and $1 in earnings per share, compared with the $2.7 billion of profits garnered in Q2 of 2010.

Vikram Pandit, the CEO of the company since prior to the financial crisis, said in a statement that the firm “produced growth in both loans and deposits in Citicorp, reduced assets in Citi Holdings, continued to invest in our core businesses, and improved our financial strength.”

International consumer banking operations, which saw an increase of 12 percent in revenues, largely drove the company’s positive results. In addition, credit losses, or losses the bank expects from its loans portfolio, declined during the quarter as more Americans paid their credit card bills on time.

“Delinquency trends continued to improve in the second quarter for most asset classes, which should result in continued credit-cost improvement. In addition, Citi has lower exposure to mortgage-related issues than do most of its peers,” said a statement from Standard & Poor’s, which affirmed Citigroup’s “A” credit rating following its earnings release last week.

Stocks were also buoyed by billionaire investor Carl Icahn’s unexpected takeover bid of consumer products maker Clorox Company. Icahn offered existing shareholders $76.50 per share to take the company private, valuing the company at over $10 billion and at a 12 percent premium over Thursday’s closing price.

Icahn is currently Clorox’s largest single investor, owning a 9.4 percent stake in the firm. He also encouraged rivals to bid for the company, especially corporate rivals, citing cost savings synergies.

Despite Icahn’s move, investors have only bid up the price of Clorox slightly. Shares of Clorox ended last Friday’s trading day at $73.90, below Icahn’s offer price.

Spanish Banks Hurting

The European Banking Authority (EBA), which conducts annual stress tests on European banking firms, reported late last week that eight European banks failed the stress test and need additional capital. An additional two dozen banks were on the bubble, EBA warned.

Five of the eight banks that failed were Spanish banks, however, all the banks are relatively small. However, the EBA’s tests did not measure how banks’ finances would be impacted should Greece default on its debt, which has caused some analysts to question the results.

“We are aware that the treatment of sovereign exposures is very contentious and the stress test itself is not designed to deal directly with every twist and turn in the crisis to deal with the sovereign debt issue,” EBA Chairwoman Andrea Enria said in a statement. “We believe our treatment is rigorous and still consistent with recent developments.”

 

Frank Yu