MarketView for June 22

Summary 

Stocks ended higher on Friday, led by gains in bank shares, as the S&P 500 index bounced back from its second-worst decline of the year. The gains were not enough to push stocks into positive territory for the week, however. The benchmark S&P index had slipped 2.2 percent on Thursday, its biggest drop since June 1, on signs of a global slowdown in manufacturing growth. For the week, the Dow lost 0.9 percent and the S&P 500 fell 0.6 percent. However, the Nasdaq was up 0.7 percent.

Bank shares, among the worst hit on Thursday, rose after Moody's Investors Service announced credit downgrades for 15 of the world's largest banks. The downgrades had been expected, but some were less severe than feared, which helped boost those shares on Friday.

JPMorgan Chase ended the day up 1.4 percent to $35.99 following a 2.6 percent drop Thursday.

Aiding market sentiment was an agreement by the leaders of Germany, France, Italy and Spain to a 130 billion euros ($156 billion) package to revive growth in the region.

Facebook shares, which Russell named in its preliminary list of additions to the Russell 3000 index, have rallied more than 21 percent in the past two weeks. The shares were up 3.8 percent to $33.05 on Friday but were still off from the $38 initial public offering price.

Darden Restaurants fell 0.7 percent to $50.04 after the operator of Olive Garden and Red Lobster restaurant chains reported sales that missed estimates and forecast weaker-than-expected profits.

Ryder Systems fell 13 percent to $35.44 after the Company cut its quarterly earnings forecast, citing lower demand at its commercial rental business.

Shares of Arena Pharmaceuticals fell about 15.4 percent to $9.88 on Friday, ahead of a key meeting in which regulators are expected to rule on whether to approve its experimental weight-loss drug.

About 7.7 billion shares changed hands on the three major equity exchanges, a number that was in-line with last year's daily average of 7.84 billion.

Citigroup Disses Moody's Downgrade

Citigroup, the lender whose credit rating was cut by Moody's to its lowest since its 1998 creation, led Wall Street banks in dismissing downgrades and urged investors to seek alternative analyses.  

Moody's two-grade cut of Citigroup's ratings was unwarranted, arbitrary and failed to recognize the lender's financial strength, the New York-based bank said in a statement. Investors shouldn't rely on "opaque" credit ratings, it said.

"Moody's approach is backward-looking and fails to recognize Citi's transformation over the past several years," said the bank, created in 1998 through the merger of Citicorp and Travelers Group Inc. "Citi believes that investors and clients have become much more sophisticated in their credit analysis over the past few years, and that few rely on ratings alone -- particularly from a single agency -- to make their credit decisions."

Citigroup, Morgan Stanley, Bank of America and Royal Bank of Scotland are among banks reacting to the downgrades, which could raise the respective firms' borrowing costs and force them to post more collateral to trading partners when dealing in derivatives, a type of financial instrument. Moody's said the four firms, which took taxpayer-funded bailouts, have a history of "high volatility" and problems with risk management.

The action by Moody's "is backward-looking and does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding and risk profile," Edinburgh-based RBS said in a statement. "The impacts of this downgrade are manageable."

Moody's lowered Citigroup and Charlotte, North Carolina- based Bank of America to Baa2, two levels above junk. The ratings firm also reduced the Citibank NA bank subsidiary by two grades. The cuts could result in "cash obligations and collateral requirements" of $1.1 billion as of the end of March, the lender said in a quarterly filing.

Citigroup and Bank of America both took $45 billion bailouts from U.S. taxpayers, which the banks have since repaid. Bank of America, led by Chief Executive Officer Brian T. Moynihan, has "significant liquidity and resources to serve clients and customers as we have transformed the company," Jerry Dubrowski, a spokesman for the lender, said in an e-mailed statement.

The ratings firm reduced RBS by one grade to Baa1. The bank received the biggest bailout of any lender during the financial crisis and is 64 percent-owned by U.K. taxpayers.

Moody's cut Morgan Stanley by two grades instead of three after CEO James Gorman said the bigger reduction would have been "somewhat stunning."

"While Moody's revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years," Morgan Stanley said in a statement. "With our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders."

Moody's has dealt out "disproportionately adverse treatment" to banks compared with their rivals in Europe, Citigroup said. This "especially surprised" the bank, which is led by CEO Vikram Pandit. The U.S. financial system is stronger than it was before the financial crisis, not weaker, the lender said.

"Actions by legislators, regulators and firms themselves have substantially enhanced the stability, and resilience, of the system," Citigroup said. "Moody's actions ignore this fact."

Moody's cut Credit Suisse by three levels. David Mathers, chief financial officer of the Zurich-based firm, said the bank has a "strong liquidity position" and a "low exposure" to the most indebted European countries.

The ratings firm, which had said it might reduce UBS's credit grade by three levels, cut that Zurich-based lender by two instead. UBS, the biggest Swiss bank, was still "disappointed" by the decision, Karina Byrne, a spokeswoman for the firm, said in an e-mailed statement.

Under Pandit, Citigroup faces challenges in "instilling a risk culture" that reduces volatile results, in part because the bank is under pressure to return capital to shareholders, Moody's said.

"Investors and clients should make their own decisions," the bank said. "Citi is aware that analytical alternatives to the ratings agencies exist today from several providers that would further enhance the ability of investors and clients to arrive at their own conclusions without being captive to the judgments of rating agencies."