U.S. stock futures rise as banks rally after Moody’s downgrades

June 22, 2012 04:49 AM

U.S. stock futures rose, after the second-biggest loss in the Standard & Poor’s 500 Index this year, as the downgrade of 15 global banks by Moody’s Investors Service was followed by rallies in financial shares.

Equity futures extended gains and the euro strengthened against the dollar after the European Central Bank announced changes to its lending program. Morgan Stanley advanced 2.8 percent after the ratings firm cut the bank by two levels rather than a threatened three grades. Bank of America Corp. and Citigroup Inc., which were lowered to within two levels of junk, rose at least 0.9 percent.

S&P 500 futures expiring in September added 0.6 percent to 1,325.5 at 9:15 a.m. New York time. Dow Jones Industrial Average futures rose 68 points, or 0.5 percent, to 12,570.

“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 downgrades for a long time. That was the best telegraphed secret I’ve seen on Wall Street in 20 years. Why does anybody pay any attention to those rating companies? They missed it during the financial crisis.”

None of the financial firms was cut more than Moody’s had forecast. Morgan Stanley’s long-term senior unsecured debt rating was reduced two grades to Baa1. The downgrades left Citigroup and Charlotte, North Carolina-based Bank of America as the lowest-rated banks among the 15 at Baa2.

The prospect of downgrades had weighed on banks 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. Pressure mounted as Europe’s sovereign-debt crisis intensified.

‘Mea Culpa’

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.”

Moody’s downgrade of 15 global banks could present a “buying opportunity” for stocks including Morgan Stanley, 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.

Financial companies rallied. Morgan Stanley, the world’s largest brokerage, jumped 2.8 percent to $14.35. Bank of America increased 1.7 percent to $7.95. Citigroup added 0.9 percent to $28.08. JPMorgan Chase & Co. gained 1.2 percent to $35.94.

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