US market hit 3-month low due to financials factor

NEW YORK: US stocks will be vulnerable to any further talk of dividend cuts, capital-raising plans or write-downs from the financial sector this week after a fresh wave of turmoil among banks pushed the market down to three-month lows.

Even the Federal Reserve's next interest rate decision due on Wednesday, when it is expected to leave rates unchanged, will take a back seat to any unexpected announcements out of Wall Street.

Stocks ended lower this week after a raft of bad news from the financial sector that left investors doubting the view that the first-quarter earnings had revealed the worst of the credit market crisis.

The Dow shed 3.8% this week, slipping below the 12,000 level for the first time since mid-March, when the market was reeling from the collapse of Bear Stearns. The S&P 500 ended 3.1% lower and the Nasdaq shed 2%.

Last Thursday, Citigroup's chief financial officer said the company could take substantial write-downs in the second quarter.

Merrill Lynch analysts said last Friday that large-cap regional banks' stocks are in "capitulation mode." The sector has already been hammered, with Fifth Third Bancorp slashing its dividend and announcing a plan to raise at least US$2 billion (RM6.6 billion). KeyCorp, another regional bank, said the week before it raised US$1.65 billion and halved its dividend.

"What we've seen from Key Bank, Fifth Third and others -- raising capital, cutting dividends -- that issue is not likely to go away and it's not out of the realm of possibility that it touches the large money center banks given what Citi said," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois. "The financial industry is an open wound that is still very sensitive."

Financials and other sectors may get some support on Wednesday when the Fed delivers its latest monetary policy decision. Interest-rate futures show traders are all but unanimous in their view that the Fed will leave its benchmark rate unchanged at 2%.

A string of Fed officials made rare comments earlier this month, speaking out about the weakness of the dollar and its dangerous impact on inflation, stoking concerns that policy-makers would hike rates, but media reports on Tuesday soothed those worries. Both The Wall Street Journal and Financial Times cited unnamed senior Fed officials saying that market expectations for a rate cut this month had been overly aggressive.

"We'll probably see some market stability after the Fed announces, said Fred Dickson, market strategist, director of retail research at DA Davidson & Co, Lake Oswego, Oregon. "With all the strong talk from the Fed, the market has responded as if they had raised rates without them actually having to do it."

A rate hike is seen as negative for stocks since it would have a near-term drag effect on the economy and could trigger more loan reserve losses and credit market write-downs in the banking system, Dickson said.

On the positive side, the Fed's hawkish rhetoric is seen as positive for the dollar and may in turn help stem the rise in oil prices, which has been a major headwind for equities.

"The market's going to continue to be very fixated on oil prices, which we think have a bias to the upside," said Matt Kaufler, portfolio manager and equity analyst at Clover Capital Management, Rochester, New York.

Higher oil prices may even prove to be detrimental for the energy sector as calls mount for the government to intervene, he added.

"It's certainly good for their profitability, but it's not good politically," said Kaufler. "They've become the whipping post for politicians, and the drum will only beat louder, the higher oil goes."

Where oil trades this week may be determined by emergency talks between oil companies, energy ministers and international organisations in Jeddah, Saudi Arabia yesterday.

The high cost of oil and surging food prices may be mentioned by companies reporting quarterly results. This week's scant earnings calendar includes a handful of consumer-related companies including Darden Restaurants tomorrow and cereal maker General Mills on Wednesday.

Two major home builders, Lennar Corp and KB Home, are set to report results on Wednesday and Thursday, respectively. Their comments, in addition to data on new- and existing-home sales, may shed light on whether the ailing housing market is nearing a bottom.