Goldman Sachs helps stocks recover from S&P shock

AP News
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Posted: Apr 19, 2011 10:37 AM
Goldman Sachs helps stocks recover from S&P shock

Upbeat earnings from Goldman Sachs helped stock markets recover Tuesday, a day after a warning from Standard & Poor's that it could downgrade the United States' credit rating.

Though the credit rating agency reaffirmed its triple A rating on U.S. debt, it warned that there is a one-in-three chance that the rating could be cut within the next two years as it lowered its outlook to "negative" from "stable" on concerns over current borrowing levels and worries that policymakers won't be able to come up with a credible deficit reduction plan.

S&P's warning prompted a big slide in the U.S. and European stock markets Monday, which followed through into the Asian session.

However, the selling associated with the S&P warning had more than run its course by the time Wall Street returned to business Tuesday _ the Dow Jones industrial average was trading 0.3 percent higher at 12,236 soon after the open while the broader Standard & Poor's 500 index rose an equivalent rate to 1,309.

In Europe, the FTSE 100 index of leading British shares was up 0.8 percent at 5,918 while Germany's DAX rose 0.6 percent to 7,071. The CAC-40 in France was 1.1 percent higher at 3,925.

"Markets have largely digested the news," said UBS analyst Chris Walker.

Sentiment was further buoyed by forecast-busting earnings from healthcare company Johnson & Johnson, investment bank Goldman Sachs and suprisingly upbeat U.S. housing data.

Given its sheer size, Goldman clearly was in focus and though its first-quarter income fell 72 percent after a $1.64 billion dividend payout to billionaire investor Warren Buffett, investors were impressed that the bank earnt $4.38 a share, up from estimates of around $4.

Despite the calmer market tone, analysts said the issue of U.S. debt is going to remain a key concern for a long time, especially if President Barack Obama and the Republican majority in the House of Representatives keep coming to budget agreements at the very last minute _ as occurred earlier this month during budget negotiations.

The change in market sentiment was also evident in the currency markets, where the dollar gave up some of Monday's big gains against the euro. The U.S. currency enjoyed one of its best days in months in the aftermath of the warning as it garnered support from its widely perceived status as a safe haven asset and rising expectations that the U.S. will have to address its debt issues to assuage market concerns.

"Be in no doubt though that what happened yesterday will focus a lot more minds on the unacceptable position of U.S. debt and that in the political arena it can no longer be shoved under the carpet," said Howard Wheeldon, senior strategist at BGC Partners.

By mid afternoon London time, the euro was 0.5 percent higher at $1.4305 while the dollar rose 0.4 percent to 82.37 yen.

The euro has been under pressure over the past few days on mounting concerns of a possible Greek default. Those concerns have persisted Tuesday, with the yield on Greece's 10-year bonds over 14.50 percent, around 11 percentage points more than Germany's equivalent rate. The picture for shorter-dated debt is even bleaker with the yield on Greece's two-year bonds running at over 20 percent.

"The real risk of a Greek restructuring is that it could open a can of worms and lead to similar moves in other peripheral countries," said Jane Foley, a senior currency strategist at Rabobank International.

"In turn this could highlight weaknesses in banks' balances sheets which would have the potential to spark a new wave of concerns about banking sector health."

Earlier in Asia, Japan's Nikkei 225 index slid 1.2 percent to close at 9,441.03 and Hong Kong's Hang Seng index fell 1.3 percent to 23,520.62. South Korea's Kospi gave up 0.3 percent to 2,131.73. Benchmarks in mainland China,

Benchmark crude for May delivery was down 89 cents to $106.80 a barrel in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok contributed to this report.