Trouble in China, and Trouble for U.S. Banks?
Our country's top Banks and Financial institutions were downgraded yesterday. Stocks included in the downgrade were: BAC, JPM, WFC, C, MS, and GS.
But at 7:16 AM this morning, the futures were indicating that ALL of them were showing a pre-market rise in their values.
Does this make sense? It is the equivalent of having a drop in your credit rating, but with the credit card companies wanting to lower your interest rates because of it.
But, everything has a reason, whether it is a good reason or bad reason.
The "reason why" explanation from the media is because China just had the first just cut on reserve requirements for their banks in almost three years.
It sounds good on the surface, but why did China lower its reserve requirements?
The answer is because their national growth rate was in jeopardy and slowing down too fast, so they are trying to re-prime the pump. This was a panic move by China last night, due to worry about further slipping of growth and the problems the current slippage is causing now.
What problem is that?
Labor union and worker unrest in increasing because factories are cutting overtime hours. For many in China, living on non-overtime work hours is just not possible, so disappearing overtime is causing huge protests by Chinese citizens. It is actually one of China's worst labor unrest situations they have seen and this is a problem that they do not want to see getting any worse.
Investors are worried about banks on a global basis now, and for good reason. Exposure to borrower debt that may never get paid is causing consternation. And this is causing perceived and real risk levels to increase in the banking sector.
Take a look at this morning's chart ... It shows the weekly action of the Banking Index in the U.S. While the SPY continued its up trend in early 2010, the Banking Index started a down trend in 2010 that is putting the S&P 500 under extreme stress. The reason is because the financials are the second larger sector in the S&P 500. At the close yesterday, the financial sector represented 13.08% of the S&P 500. If the Banking Index falls below 33.2, it will inflict serious harm to the S&P 500. (FYI ... the symbol for the Banking Index is $BKX.)