Ripple effect felt across the Atlantic, US stocks fall

US stocks fell, snapping a four-day rally for the Standard & Poor’s 500 Index, as euro region governments braced for possible credit downgrades by S&P and as JPMorgan Chase & Co’s profit slumped 23 per cent.

All 10 groups in the S&P 500 declined as financial, industrial and commodity gauges slid at least one per cent. JPMorgan, the largest US bank by assets, retreated 3.8 per cent. Bank of America Corp, Morgan Stanley and Citigroup Inc retreated at least 2.2 per cent. Eastman Kodak Co tumbled 21 per cent as the unprofitable imaging company is said to be in talks with Citigroup to provide bankruptcy financing.

The S&P 500 lost 0.9 per cent to 1,284.30 as of 11.14 am New York time. The benchmark gauge advanced 1.4 per cent over the previous four days. The Dow Jones Industrial Average slid 98.61 points, or 0.8 per cent, to 12,372.41 on Friday.

“People are keeping a very careful eye on Europe and they are nervous with earnings,” Mark Bronzo, who helps manage $23.4 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “It’s critical that any downgrades in Europe do not involve Germany. Most people expected France to be downgraded. It appears that they will be. If it’s more than one letter downgrade, that might be significant,” he said. In the US, “JPMorgan’s earnings were OK, but the quality is not good.”

Stocks tumbled as a European government official said France is among several euro-area countries facing downgrades by S&P in the review, which is due at 9 pm Frankfurt time. Germany, Europe’s biggest economy, will retain its AAA rating in a review of euro-area countries’ credit grades by S&P, the official said on condition of anonymity because the announcement has yet to be made.

Economic Data
Concern about potential downgrades overshadowed data showing that confidence among U.S. consumers rose more than forecast in January to the highest level in eight months, a sign household spending may hold up early this year. Separate figures showed that the U.S. trade deficit widened more than forecast in November as American exports declined and companies stepped up imports of crude oil and automobiles.

The S&P 500 was still headed for the second week of gains amid lower borrowing costs at auctions in Europe. Investors also watched fourth-quarter results. S&P 500 companies, which beat estimates in the previous 11 quarters, are forecast to report a 6 percent increase in per-share profit during the September- December period, according to projections compiled by Bloomberg.

Financial companies slumped. JPMorgan dropped 3.8 percent to $35.46. Investment-banking revenue declined 30 percent to $4.36 billion from a year earlier as many clients stayed on the sidelines on concern the European debt crisis would lead to a global economic slowdown.

‘Disruption’
“Financials would have to participate for the market to do well,” James Dunigan, who helps oversee $104 billion as chief investment officer in Philadelphia for PNC Wealth Management, said in a telephone interview. “We’ll look to see whether all that disruption in Europe had some an effect in overall earnings reports. If that bleeds over into our export numbers, it may have an impact on the earnings side.”

Bank of America lost 3.1 percent to $6.58, while Morgan Stanley (MS) retreated 2.2 percent to $16.79. Citigroup fell 2.2 percent to $30.92. Goldman Sachs Group Inc. (GS) slid 2.8 percent to $98.37.

Kodak tumbled 21 percent to 53 cents. The company may seek protection from creditors within weeks and then hold an auction to sell its patent portfolio, said three people familiar with the matter, who asked not to be identified because the talks are private. Kodak may seek about $1 billion in so-called debtor-in- possession financing, though terms may change, two people said.

Analyst Downgrades
United Parcel Service Inc. declined 1.3 percent to $73.77. The world’s largest package-delivery company was cut to “neutral” from “overweight” at JPMorgan.

Charles Schwab Corp. (SCHW) lost 2.3 percent to $12.19. The independent, San Francisco-based brokerage was downgraded to “market perform” from “outperform” at Wells Fargo & Co.

Diamond Foods Inc. sank 9.9 percent to $29.85. Federal prosecutors are coordinating with the U.S. Securities & Exchange Commission to investigate how the snack maker paid its walnut growers, the Wall Street Journal reported on its website, citing unidentified sources. Lucy Neugart, a spokeswoman for Diamond Foods, declined to comment.

Stock investors shouldn’t get used to the relative calm that markets are now showing, according to Andrew Garthwaite, a global equity strategist at Credit Suisse Group AG.

Volatility to Rise
Volatility is likely to rise this year, Garthwaite wrote yesterday in a report. He attributed the outlook to excessive borrowing in developed economies, which ensures that investors will be “abnormally sensitive” to shifts in economic growth and government policy, he added.

“Sentiment in the market has clearly changed over the past three months,” wrote Garthwaite, who is based in London. Both volatility gauges erased almost all of their gains from last year’s second-half stock slump. The reading for the S&P 500 dropped below 20 yesterday for the first time since Aug. 3.

Even so, developed-country debt is still $8 trillion too high, the report said. Garthwaite came up with that estimate by comparing the borrowing relative to gross domestic product with a figure based on the debt-to-GDP ratio’s trend during the past three decades.

The need to reduce this burden creates “a considerable amount of tail risk,” or potential for unlikely stock-market outcomes, the report said. He mentioned 11 possible surprises for this year. One was a breakup of the euro region, which he estimated would send the S&P 500 falling to 800, or 38 percent less than yesterday’s close.

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