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A strong rally in banking shares helped benchmarks return to their winning ways just a day after markets incurred their second-worst losses for the year. Banking stocks rallied despite a rate cut by Moody's Investors Services after the closing bell on Thursday. However, Friday’s gains failed to help the Dow and S&P 500 to finish in the green for the week and the Nasdaq was the only benchmark which bucked the trend.
The Dow Jones Industrial Average (DJI) gained 0.5% and ended at 12,640.78. The Standard & Poor 500 (S&P 500) surged 0.7% and finished Friday’s trading session at 1,335.02. The tech-laden Nasdaq Composite Index jumped 1.2% and was up 33.33 points to close at 2,892.42. The fear-gauge CBOE Volatility Index (VIX) slumped 9.8% and settled at 18.11. Consolidated volumes on the New York Stock Exchange, the American Stock Exchange and Nasdaq were roughly 7.7 billion shares, just short of last year's daily average of 7.84 billion. Advancing stocks outnumbered the decliners on the NYSE. While 66% gained, 30% stocks moved down.
After the closing bell on Thursday, Moody's Investors Service downgraded credit ratings of more than 15 major global banks. These included five of the biggest domestic banks, namely Bank of America Corporation (NYSE:BAC), Citigroup, Inc. (NYSE:C), The Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS). Bank of America was downgraded by a notch to Baa2 from Baa1, while the rest were downgraded by two notches. Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley dropped to Baa2, A3, A2 and Baa1 from A3, A1, Aa3 and A2, respectively.
The financial arena has been fraught by turmoil over the past few months which included European debt woes and dismal economic readings both in the U.S. and China, the world’s second-largest economy. The ratings downgrade in the banking sector came amidst such times and analysts opined that such an action was already anticipated. Further, the downgrades of few banks were less severe than what was expected. Thus, banking stocks were hardly affected and apart from Goldman Sachs, which dropped 0.3%, all of these banks moved higher on Friday. Bank of America, Citigroup, JPMorgan and Morgan Stanley gained 1.5%, 0.6%, 1.4%, and 1.3%, respectively.
Separately, the European Central Bank (ECB) eased its rules on collaterals. In a statement, ECB noted: "The Governing Council has reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABS)… It has thus broadened the scope of the measures to increase collateral availability which were introduced on 8 December 2011 and which remain applicable".
Investor sentiment thus remained positive throughout Friday’s session, just a day after markets witnessed their second-worst showing of the year following dismal global economic readings. On Thursday, benchmarks were battered by reports of China's manufacturing activity plunging to the lowest level in seven months, while Euro-zone’s business activity continued its downslide for the fifth straight month. Things were not bright on the home front too, as initial claims dropped and Philadelphia Fed’s data on U.S. mid-Atlantic region’s manufacturing activity showed signs of contraction. While these factors severely affected the benchmarks on Thursday, gains on Friday could only curb weekly losses. The Dow and S&P 500 dropped 1.0% and 0.6%, respectively, for the week. However, the Nasdaq gained 0.7%.