Stocks Drop on Bank Margins; Crops Lead Commodities Lower

U.S. stocks erased an early rally as Wells Fargo & Co. (WFC)’s shrinking profit margin and weakness in European markets overshadowed a jump in consumer confidence to the highest level since the recession started. Commodities sank and the euro trimmed an early gain.

The Standard & Poor’s 500 Index slipped 0.3 percent to 1,428.59 at 4 p.m. in New York, after rising as much as 0.4 percent, and the Stoxx Europe 600 Index lost 0.5 percent. Ten- year Treasury yields fell one basis point to 1.66 percent. Industrial metals and crops led commodities lower. The euro was up 0.2 percent at $1.2955 after rising as much as 0.5 percent, while South Africa’s rand erased gains and tumbled 0.8 percent as the nation’s credit rating was cut to BBB at S&P.

Wells Fargo and JPMorgan Chase & Co. paced a retreat in banks as improving earnings were overshadowed by a drop in net- interest margin, a gauge of the profitability of lending. U.S. equities rallied earlier after the Thomson Reuters/University of Michigan preliminary October consumer sentiment index increased to 83.1 from 78.3 the prior month, topping the median estimate of 78 in a survey of economists.

“The headline macro numbers are getting diminished by the fact that you’re not seeing the follow-through on earnings, revenues, outlooks,” Matt McCormick, who helps oversee $7 billion at Cincinnati-based Bahl & Gaynor Inc., said in a telephone interview. “There was a lot of build-up and high expectations for Wells Fargo and JPMorgan and people were underwhelmed.”

Weekly Loss

The S&P 500 has lost more than 2.5 percent since climbing to an almost five-year high on Sept. 14 after the Federal Reserve announced plans to buy $40 billion of mortgage securities a month to stoke economic growth. The benchmark index lost 2.2 percent this week, its biggest drop since late May and early June.

Advanced Micro Devices Inc., the second-largest maker of processors for personal computers, plunged 14 percent today to lead declines after it cut its third-quarter revenue forecast, citing weak demand across all product lines in a challenging economic environment.

Banks in the S&P 500 led declines among 24 industries today, losing 2.7 percent as a group. JPMorgan, the largest U.S. bank by assets, slid 1.1 percent even after posting net income rose 34 percent on gains from mortgages and trading. Wells Fargo tumbled as its shrinking lending margin overshadowed record earnings. Wells Fargo’s net-interest margin, the difference between what the bank makes on loans and pays for funds, narrowed 0.25 percentage point to 3.66 percent in the quarter. JPMorgan’s margin slipped to 2.43 percent from 2.66 percent a year earlier.

Banks Drop

First Horizon National Corp., Regions Financial Corp., SunTrust Banks Inc., Fifth Third Bancorp and PNC Financial Services Group Inc., all lenders that will report results this month, slumped more than 3 percent and were among the largest declines in the S&P 500.

Signs of a housing recovery prompted Wall Street firms to raise estimates for profit growth at banks to 17 percent for the third quarter and 33 percent in the fourth. Companies in the S&P 500 are expected to snap a three-year streak of profit growth, with earnings last quarter projected to decrease 0.9 percent from the previous year, according to analyst estimates compiled by Bloomberg.

Management Pessimism

Earnings pessimism among U.S. companies is climbing to levels last seen when stocks were mired in bear markets. Over the last four weeks, the ratio of companies saying profits will trail estimates compared with those saying they will exceed them climbed to 4.3, according to 69 earnings previews compiled by Bloomberg. The rate matches peaks reached in February 2009 and October 2001, the data show.

The start of the earnings season has overshadowed recent better-than-estimated U.S. economic data, including a drop in the unemployment rate to 7.8 percent, according to a Labor Department report last week. The jobless rate has become a focal point in President Barack Obama’s bid for a second term. Vice President Joe Biden and Republican Paul Ryan each said in a TV debate yesterday that their parties’ proposals would bring the rate below 6 percent.

Commodities Retreat

The S&P GSCI Index retreated 1 percent as 19 of 24 commodities declined. Crude oil slipped 21 cents to $91.86 a barrel. Gasoline tumbled more than 3 percent in New York, dropping for a second day. Global refiners will process 400,000 barrels a day less crude in the fourth quarter because of plant halts and a lower demand outlook, the Paris-based International Energy Agency said in a monthly report today. Corn fell from a three-week high and soybeans declined after a government report showed slowing demand for supplies from the U.S., the world’s biggest grower and exporter.

The euro was stronger against 12 of 16 major peers while retreating from its high of the day of almost $1.30 against the dollar.

The 17-nation currency pared its advance and European stocks extended losses after Reuters reported that the European Stability Mechanism lacks the cash to bail out Spain if the country asks for help before the end of the year. However, guidelines obtained by Bloomberg News last month showed the fund has the authority to raise funds through the sale of fixed- income securities.

The Stoxx 600’s decline extended this week’s drop to 1.7 percent. The region’s equities fell for the fourth time in five days as International Monetary Fund Managing Director Christine Lagarde said global growth is not fast enough to curb unemployment, and Chinese new lending missed estimates.

European Movers

Akzo Nobel NV (AKZA) slid 6.1 percent as Chief Executive Officer Ton Buechner extended his leave from the company. MAN SE fell 3.3 percent after the maker of vehicles and trucks said 2013 will be tougher than this year. Standard Chartered Plc and Axa SA climbed as Deutsche Bank AG raised its rating for the banking and insurance sectors.

Industrial production in the euro area rose 0.6 percent in August from July, the European Union’s statistics office in Luxembourg said today. Economists had projected a drop of 0.4 percent, the median of 36 estimates compiled by Bloomberg. Economic growth in Germany will stagnate in the second half, Bundesbank Jens Weidmann told reporters in Tokyo today.

“The market is nervously trying to focus on where the growth is going to come from,” James Bevan, chief investment officer at London-based CCLA Investment Management Ltd., said on Bloomberg Television’s “On the Move” with Francine Lacqua. “We know the central banks are prepared to print money. That’s absolutely great. What we haven’t seen is any follow through from the fundamental real economy.”

Spanish Yields

Spain’s two-year note yield dropped 14 basis points to 3.08 percent and 10-year rates declined 14 basis points to 5.63 percent. The nation wants there to be consensus among European governments on any bailout request before deciding whether to ask for help, Deputy Prime Minister Soraya Saenz de Santamaria said yesterday.

The MSCI Emerging Market Index was little changed as Brazil’s Bovespa increased 1.2 percent and Russia’s Micex lost a similar amount. Hong Kong’s Hang Seng gauge advanced 0.7 percent after state-run Central Huijin Investment Ltd. said it will continue market operations after increasing stakes in the nation’s banks.

Emerging Markets

The BSE India Sensitive 30 Index (SENSEX) fell 0.7 percent as Infosys Ltd. slumped the most in six months. The country’s second-largest software services exporter cut its sales-growth forecast and said higher wages and currency fluctuations will hurt profitability.

The rand pared its first weekly advance in five. S&P reduced South Africa’s long-term foreign currency rating to BBB from BBB+ and the local-currency ranking was cut to A-. The outlook for the rating was set at negative. The currency rallied 1 percent earlier today as South African truck drivers agreed to end a strike.

China’s yuan strengthened for a 10th straight week, touching the highest level in 19 years, on speculation the government will announce measures to revive growth in the world’s second-largest economy.

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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