U.S. Stocks Rise as Banks Rally After Moody’s Downgrades

U.S. stocks advanced, following yesterday’s global selloff, as bank downgrades from Moody’s Investors Service were no worse than the firm had warned.

Morgan Stanley (MS) climbed 1.3 percent as the ratings firm cut the bank by two levels rather than a threatened three grades. Bank of America Corp. and Citigroup Inc. (C), which were lowered to within two levels of junk, increased at least 0.5 percent. Merck & Co. jumped 1.9 percent after being added to the U.S. Focus list at Credit Suisse Group AG. Facebook Inc. (FB) rallied 3.8 percent as Nomura Holdings Inc. recommended buying the shares.

The Standard & Poor’s 500 Index increased 0.7 percent to 1,335.02 at 4 p.m. New York time. The gauge trimmed this week’s decline to 0.6 percent. The Dow Jones Industrial Average advanced 67.21 points, or 0.5 percent, to 12,640.78 today.

“The bad news is out and it was not as bad as expected,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida. His firm oversees $350 billion. “They had been telegraphing the bank downgrades for a long time. Why does anybody pay any attention to those rating companies? They missed it during the financial crisis.”

Banks rose the most among 24 S&P 500 groups today, rallying 1.5 percent. The prospect of downgrades had weighed on the financial industry since Moody’s said Feb. 15 it was reviewing 17 banks with capital-markets operations because of fragile confidence and tighter regulations that pinched revenue.

The reductions by Moody’s are “a mea culpa from 2007 and 2008,” said James Leonard, a credit analyst at Morningstar Inc. “The banks have gotten so much better in the last few years in terms of capital, yet their ratings keep going down. What does that tell you? That the ratings were so wrong before.”

Morgan Stanley

Morgan Stanley added 1.3 percent to $14.14. Its long-term senior unsecured debt rating was reduced two grades to Baa1. Bank of America gained 1.5 percent to $7.94, while Citigroup rose 0.6 percent to $27.99. The downgrades left the two lenders as the lowest-rated banks among the 15 at Baa2. JPMorgan Chase & Co. (JPM) gained 1.4 percent to $35.99.

Moody’s downgrade could present a “buying opportunity” for stocks, said Paul Miller, an analyst at FBR Capital Markets. The downgrades should have happened earlier, Miller, a former examiner for the Federal Reserve Bank of Philadelphia, said today in an interview on Bloomberg Television.

Russell Investments’ annual rebalancing of stocks in its indexes was scheduled to occur after the market close today, spurring one of the busiest trading days of the year. Volume for exchange-listed stocks in the U.S. was about 9.7 billion shares, or 42 percent above the three-month average.

Bear Market

Equities tumbled yesterday, while commodities entered a bear market, after signals of a global slowdown in manufacturing added to disappointing housing and labor market data at the world’s largest economy. The reports came out a day after the Federal Reserve lowered its growth and employment estimates while signaling it may add to its record stimulus.

Investors also watched news out of Europe. The euro strengthened against the dollar after the European Central Bank eased terms for collateral, boosting speculation the central bank will announce a third set of long-term loans. Spanish policy makers are considering forcing investors who hold equity and junior debt in banks to absorb losses in a restructuring, according to a person with knowledge of the plan.

“Time is running out,” said Brad Sorensen, director of market and sector analysis at San Francisco-based Charles Schwab Corp. His firm has $1.76 trillion in client assets. “These tiny things may buy them a little time. They’re just very small measures compared to the problems that they have over there.”

Merck Rallies

All 10 groups in the S&P 500 rose today as technology, health-care and financial shares had the biggest gains. Merck jumped 1.9 percent to $40.18.

Facebook added 3.8 percent to $33.05. The company was rated buy in new coverage at Nomura. The firm has a share-price estimate of $40.

First Solar Inc. (FSLR) increased 9.2 percent, the most in the S&P 500, to $15.88. The largest maker of thin-film solar panels received permission to continue construction on a $1.36 billion power project in Los Angeles County.

Harvest Natural Resources Inc. (HNR) surged 87 percent to $9.12. It agreed to sell its 32 percent stake in Petrodelta SA, a joint venture with Petroleos de Venezuela SA, to Indonesia’s state- owned oil company PT Pertamina for $725 million in cash.

The Dow Jones Transportation Average slid 0.8 percent. Ryder System Inc. (R), a U.S. truck leasing company, fell 13 percent to $35.44 after cutting its full-year earnings forecast because of lower demand for commercial rentals.

Yield Outlook

Carnival Corp. (CCL) dropped 2.7 percent to $33.66. The largest cruise operator posted a 93 percent drop in second-quarter profit and lowered the yield outlook for the year, a development that Telsey Advisory Group said may signal softening prices.

Darden Restaurants Inc. (DRI) slid 0.7 percent to $50.04. Fourth- quarter revenue trailed analysts’ estimates because of an unexpected decline in sales at the company’s older restaurants.

BNP Paribas Investment Partners bought equities across Europe, the U.S. and emerging markets this week as evidence mounts that central banks are more willing to support economies.

The firm’s Global Business Solutions unit, which manages about 35 billion euros ($44 billion) in assets, raised its holding in equities to neutral, meaning it now owns an equal amount of equities as is represented in indexes.

“Markets have stabilized; we think a lot of the slowdown in growth has been discounted,” Joost van Leenders, a strategist at BNP in Amsterdam said in a telephone interview. “Looking at the markets in the last few days, we may have been a bit premature, but we have been underweight since March, which was pretty good timing then.”

The MSCI World Index (MXWO) has risen 4.7 percent from this year’s low on June 4, as China and Australia cut interest rates, the European Central Bank said it’s ready to add more stimulus if required and the Federal Reserve extended its Operation Twist program in a bid to reduce borrowing costs.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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