MarketView for June 2

Summary  

Stocks rallied on Wednesday sending the key equity indexes well into positive territory with gains over 2 percent across the board as Wall Street grabbed up beaten-down shares, led by energy, which bore the brunt of the sell-off a day earlier. The energy sector handily led the way up with the S&P energy index gaining 4.3 percent. Shares of Halliburton rose 12 percent after executives said the offshore oil industry had plenty of work even as the Obama administration imposed a six-month moratorium on deep-water drilling. Halliburton closed at $23.68, while Schlumberger gained 8.8 percent to close at $56.31.

Shares of BP rose 3.1 percent to $37.66 even as the company hit a snag in its latest effort to halt the oil spill in the Gulf of Mexico. Nonetheless, the stock is down close to 38 percent since the rig explosion of April 20.

The auto industry posted double-digit domestic sales gains in May from depressed levels a year earlier, including Ford, which whose shares were up 3.9 percent to $11.85.

The Street was also encouraged by data indicating that pending sales of previously owned homes increased to a six-month high in April, although a portion of the rise was due to buyer trying to take advantage of the home buyer's tax credit before it expired.

United Airlines parent UAL Corp rose 12.6 percent to $21.78 after Bank of America-Merrill Lynch reinstated the company with a "buy" rating, saying it had good momentum whether or not it merged with Continental Airlines.

Amgen helped the Nasdaq, gaining 10.5 percent to $56.09 after the FDA approved the sale of its osteoporosis drug to help prevent fractures in post-menopausal women.

Outlook for Banking Industry Improves

Banks are slowly working their way through a mountain of non-performing loans from the credit crisis, but dangers still abound, two credit rating agencies said on Wednesday. Among the risks still looming are the impact of the European sovereign debt crisis and the chance the global economy may deteriorate.

Moody's Investors Service said in a first-quarter report it estimates the U.S. banks it rates have made about 60 percent of the total $744 billion of aggregate loan charge-offs they will undertake from 2008 to 2011. The remaining losses, though sizable, are beginning to look manageable, Moody's said.

It warned, however, that "a worsening of the global economy in 2010, the probability of which Moody's places at 10 percent to 20 percent, would significantly strain bank fundamental credit quality." That possibility "drives our continuing negative outlook for the U.S. banking sector," Moody's said. Moody's also warned of problems on banks' balance sheets.

By contrast, Fitch Ratings was more optimistic in its broad assessment of the U.S. banking sector. Fitch revised up its overall U.S. banking sector outlook to stable from negative, as bank earnings and capital positions improve and non-performing assets stabilize.

The outlook had been negative since late 2007, when the global financial crisis was starting. In the aftermath of the crisis, which reached its nadir more than a year ago, bank earnings have been slowly recovering, Fitch said in a first-quarter report.

"With U.S. banks reporting results for the most recent quarter, it is becoming more apparent that financial stability is beginning to emerge across the industry," Fitch wrote.

Fitch expects bank core earnings to continue to show slow but steady improvement over the next few quarters.

"Further supporting Fitch's revised outlook is the stabilization of non-performing assets and the vastly improved capital and liquidity positions of the larger U.S. banks in general," it said. However, bank earnings and revenue are still comparatively weak relative to pre-crisis levels and will likely remain pressured over the next few quarters, Fitch said.

Despite two straight quarters of improvement in bank charge-offs, charge-offs remain near historic highs dating back to the Great Depression, while the commercial real estate market could yet decline further, pushing charge-offs up again, Moody's said.

Fitch said its overall stable outlook "does not incorporate exogenous shocks," but the agency "would factor in any such events should they occur."

"Fitch is mindful of risks associated with the ongoing sovereign debt crisis in Europe, as well as the budgetary pressures across many U.S. states and municipalities, which could pose new risks for banks in general," it said.

For those banks that still have a negative outlook, Fitch said it "anticipates resolving these individually over the next few months." That could result in outlooks going to stable or in more limited instances, in a one notch downgrade, with the outlook then going to stable, Fitch said.

Pending Home Sales At 6-Month High

Pending home sales hit a six-month high in April, but a drop in the demand for mortgages indicated an ebbing degree of activity in the vital housing market as a result of the expiration of a popular tax credit for buyers. Nonetheless, any slowdown in home sales is likely to be temporary, as the broadening economic recovery continues, along with low mortgage rates and a strengthening labor market. Data also showed planned layoffs at U.S. companies drifting back to pre-recession levels.

The National Association of Realtors' Pending Home Sales Index, based on contracts signed in April, increased 6 percent to 110.9 -- the highest level since October and above expectations of a 5 percent rise. It was the third straight month of gains. However, applications for loans to buy homes dropped last week for the fourth straight week, holding at 13-year lows, the Mortgage Bankers Association said.

The surge in pending home sales, which lead sales of existing home sales by a month or two, reflected a last-minute rush by prospective homeowners to sign contracts before April 30 to qualify for a government homebuyer tax credit. Contracts have to close by the end of June.

The U.S. housing market, whose crash was at the epicenter of the global financial crisis, is seen as a barometer for the broader U.S. economy as it emerges from its worst recession in 70 years.