Moody’s has telegraphed a banking sector review for quite some time, and it has actually been ongoing and the ‘bad news’ should be out very soon. We skipped many of the smaller incidents, but the German banks were just downgraded by Moody’s already. Deutsche Bank AG (NYSE: DB) rose over 4% in New York trading on Tuesday even though Moody’s warned that the German and Austrian banks do not currently have enough capital to survive a severe downturn. Moody’s slashed the ratings on Italian banks in mid-May. Other warnings have been sent as well, even one to Puerto Rico.
General Electric Co. (NYSE: GE) was warned of a Moody’s downgrade in March, but Ford Motor Co. (NYSE: F) just got raised to investment grade in the last week and General Motors Corp. (NYSE: GM) was signaled that it could be investment grade soon.
Moody’s warned back in February in a very staged method that Credit Suisse Group (NYSE: CS), Morgan Stanley (NYSE: MS), and UBS AG (NYSE: UBS) could be downgraded potentially by as many as three notches. Morgan Stanley recently noted that it might only be a two-notch downgrade and that it does not need to raise more capital.
Also from February: Warnings of a two notch downgrade were handed out to Barclays PLC (NYSE: BCS), BNP Paribas, Credit Agricole, Deutsche Bank AG (NYSE: DB), Goldman Sachs Group Inc. (NYSE: GS) and HSBC Holdings PLC (NYSE: HBC). Bank of America Corporation (NYSE: BAC) and Nomura Holdings, Inc. (NYSE: NMR) were “only” given warnings of a possible one notch downgrade.
The big banks have been up today on hopes of more government support and intervention. This upcoming Moody’s event has been very well telegraphed. Now the question is not if they banks will be cut in credit ratings… It is simply BY HOW MUCH?
To show a final barometer… The highly volatile and triple-leveraged Direxion Daily Financial Bull 3X Shares (AMEX: FAS) is up 8.1% at $77.96, the DJIA closed up 286 points, and the S&P closed up more than 29 points.
JON C. OGG