Wall Street managed to creep back into positive territory this afternoon thanks to Citigroup's better-than-expected first-quarter results.
Lingering worries over Goldman's fraud charges and tightening expectations in China and India weighed on commodities and resource shares, however.
By 3.45pm (London time), the Dow Jones Industrial Average was 16.4 points (+0.15%) above its previous close at 11035.06, while the broader S&P 500 was 1.56 points (+0.13%) higher at 1193.69.
Investors cheered today after Citigroup reported its strongest quarterly profit since 2007. The group's first-quarter net profit more than doubled to $4.43 billion, or 15 cents a share, following smaller losses from bad loans. This was substantially better than expectations that it would break even.
'Realistically, we do not expect our performance to follow an invariable trend-line upward,' Citigroup’s chief executive Vikram Pandit cautioned. 'Longer-term, however, the prospects for Citi are clear and bright.'
The encouraging results sent Citigroup's shares rallying 6.6% to $4.86, helping peers Bank of America advance 0.50% to $18.50 and Wells Fargo climb 1.7% to $33.11 this afternoon.
Banks also benefitted from an upbeat sector report from Nomura, which suggested the recent bank-share rally may continue. 'On one times book, the global bank sector is not only cheaply priced, but discounts very little of the on-going benefits of a steeply sloped yield curve for sector earnings and rapidly improving credit quality for the balance sheet.'
Shares of Goldman Sachs continued to slide, however, down 1.7% to $158 a share following a 13% plunge on Friday, after the US Securities Exchange Commission (SEC) filed civil charges against the bank and one of its vice presidents for defrauding investors through the use of a financial product tied to subprime mortgages.
Meanwhile, the UK's Financial Services Authority (FSA) today said it has begun a preliminary investigation into Goldman Sachs. A regulatory spokesman today said, 'As you would expect the FSA is investigating the circumstances of this case and whether there are implications for the UK-regulated entities of Goldman Sachs. If there are, we will take appropriate action.'
In the greater scheme of things, the US banking sector gains suggest that investors are now treating Goldman's case as an idiosyncratic event – one that is only limited to the company – and not a systemic one that will affect the entire sector. It is, nevertheless, still too soon to tell whether other banks will fall victim to similar charges. What's more certain, however, is the fact that the latest development reinforces the need for tighter financial sector regulation – a prospect that may weigh on the sector's earnings expectations.
US mining shares were predominantly depressed today, as tightening speculation in India and China led investors to speculate that demand for global commodities may weaken.
India's central bank today said it will start focusing on policies that will contain rising inflationary pressures. 'While recovery in private demand needs to be stronger to reinforce the growth momentum, the already-elevated headline inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth,' the Reserve Bank of India said today. Investors expect the Reserve Bank of India to raise interest rates again tomorrow following a surprise rate hike last month.
News about China taking additional steps to control speculative buying of real estate also weighed on miners. The new measures include allowing banks to refuse additional mortgages for home buyers who already own two or more properties. These policies are more restrictive than initially anticipated.
July high-grade copper was down by 0.3% to $3.45255 per pound this afternoon, while June palladium futures fell 0.25% to $530.5 per troy ounce. June gold futures fared relatively better, however, declining only 0.08% to $1,135.9 per troy ounce. May crude oil (WTI) futures were also in the red, down 2.4% to $81.27 a barrel, as investors flocked back to the safety of the US dollar, which has gathered upside momentum following the a stronger-than-expected 1.4% gain in the US leading indicators index for March.
Falling commodity prices exerted pressure on miners, sending shares of Barrick Gold Corp down by 1.3% to $38.60 and Freeport-McMoRan Copper & Gold 0.7% lower to $80.60 a share.
