By Ishaq Siddiqi Of DOW JONES NEWSWIRES
LONDON (Dow Jones)–European stock markets are expected to fall at the open Friday, hit by U.S. banking giant J.P. Morgan Chase & Co. booking at least $2 billion in trading losses, while caution persists ahead of further political developments in Greece.
Investors have been spooked by J.P. Morgan’s surprise announcement of losses at its investment arm late Thursday. The bank’s chief executive said in a hastily arranged post-close conference call that J.P. Morgan booked a $2 billion in trading losses in the past six weeks and could face an additional $1 billion in second-quarter losses due to market volatility.
The losses stemmed from derivatives bets gone wrong in the bank’s Chief Investment Office, part of the corporate branch of the bank that manages risk for the company. “The timing and magnitude of the announcement are certainly poor, given the intensity of the current regulatory debate surrounding proprietary trading…[and] the outsized use of synthetic derivatives to hedge credit risk across the organization,” said Todd L. Hagerman, analyst at Sterne Agee & Leach.
Furthermore, the losses at J.P. Morgan also likely make Moody’s Investors Service more steadfast in its deteriorated industry views, said Glenn Schorr, analyst at Nomura. “In the end, while there’s value in the stock and the other large banks/brokers, our gut is investors may be even more comfortable with their underweight positions,” Schorr said.
The JP Morgan news overshadowed developments in Greece that seemed to marginally improve. Hopes of a Greek coalition government willing to stick to austerity pledges and hints at some form of flexibility on the euro-zone government side have boosted sentiment, said Credit Agricole. But, “as the negotiation in forming a Greek coalition government is ongoing and political uncertainty remains elevated, investors will likely to stay cautious,” added Credit Agricole.
Against this backdrop, European stock markets are called to open lower Friday with IG Markets expecting the U.K.’s FTSE 100 index to open around 26 points lower at 5517, Germany’s DAX index down by 46 points to 6472 and France’s CAC-40 index lower by 28 points to 3102.
Caution also persists ahead of the Spanish government’s announcement on a clean-up of its banking sector due Friday, with media reports speculating that banks could be forced to ramp up their provisions on property loans to a range of 25% to 30% from 7% previously. Worries about the Spanish banking sector have risen sharply in recent days, with the country’s government late Wednesday moving to rescue its fourth-largest bank by market value, Bankia, by taking a large stake in the group.
Asian markets fell Friday as the surprise loss from J.P. Morgan Chase & Co. bruised sentiment. Japan’s Nikkei was down 0.6%, while South Korea’s Kospi fell 1.3%. The Hang Seng index in Hong Kong dropped for a seventh consecutive session, down 1.2%, while the China Shanghai Composite edged 0.3% lower.
The losses came despite a positive U.S. lead, as the Dow Jones Industrial Average snapped a six-session slump overnight, helped by a fall in jobless claims and signs of stabilization in Europe. The DJIA rose 19.98 points, or 0.2%, to 12855.04, while the Standard & Poor’s 500 stock index ended up but off its highs of the day, gaining 3.41 points, or 0.3%, to 1357.99.
In the currency markets, the euro was drifting lower against the U.S. dollar Friday. At 0603, the single currency was trading at $1.2913 from $1.2934 late Thursday in New York, while the dollar was at 79.79 against the yen from 79.93 late in New York.
In other markets, June Nymex crude was down $1.14 at $95.94 a barrel, while June Brent crude oil futures were down $0.98 at $111.75 a barrel. Spot gold was down $13.60 at $1582.90 a troy ounce. The June bund contract was 28 ticks higher at 142.89.