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While you were sleeping: Hold your horses

Friday 14th October 2011

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A gentle yet clear reminder of reality in the form of disappointing results from JPMorgan Chase and sluggish data on China’s economy prompted some investors to lock in profits.

China's trade surplus shrank for a second straight month in September as both imports and exports fell short of expectations, suggesting slowing demand at home and abroad. Its latest inflation report is due this morning.

But for US investors, it was a drop in JPMorgan’s third-quarter net profit that served as a stark reminder that Europe’s debt crisis is a global concern.

Shares of Bank of America, Citigroup and Morgan Stanley were all down about 5%, while Goldman Sachs was off 3.5%. All are due to report third-quarter results next week.

“The fact that these bank stocks, in talks of massive recapitalisation, have been hit very hard today tells you that nothing has been resolved and the euro does not have much upside potential,” John McCarthy, managing director of currency trading at ING Groep NV in New York, told Bloomberg.

“JPMorgan in some respects is our strongest financial institution, and if it is coming in under estimates, that bodes ill for the rest of the sector.”

In afternoon trading in New York, the Dow Jones Industrial Average fell 0.34% and the Standard & Poor's 500 Index shed 0.42%. The Nasdaq Composite Index, however, rose 0.25%.

Europe’s Stoxx 600 Index closed the day with a 1.1% decline.

"We've had a pretty decent rally from the nadir, but we can't continue to go straight up in the absence of anything definite from Europe," Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, told Reuters. "We've been rising on hope rather than anything tangible."

While Slovakia's parliament today backed a plan to bolster the euro zone's EFSF rescue fund, there is no tangible solution for the region’s fiscal crisis yet. In fact, more warnings were issued overnight.

The EU is due to hold a summit on October 23 to agree further measures to protect euro zone banks if Greece defaults on its debts.

The euro, which today fell 0.4% to US$1.3737, might weaken to US$1.20 within three months as its runs into resistance levels following its rally over the past week, Commerzbank AG said in a note to clients, citing trading patterns, according to Bloomberg News.

The European Central Bank said financial institutions’ involvement in the region’s bailouts through enforced investor losses posed a risk to financial stability and would have “direct negative effects” on lenders.

Separately, Deutsche Bank Chief Executive Josef Ackermann said there are limits to the size of rescue funds for the euro zone because the public and courts would not allow them to grow over a certain size.

German banks were preparing for losses of as much as 60% on their Greek government debt holdings, Bloomberg reported, citing three people with knowledge of the matter.

JPMorgan Chief Executive Jamie Dimon said the company will slash 1,000 jobs in its investment bank over the next 18 months, adding that the cuts are mainly due to increased use of automation.

"There were some very strong headwinds for JPMorgan," Marshall Front, chairman of Front Barnett Associates, told Reuters.


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