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28 February 2024

Fate of GM and banks to keep stock market investors on edge

By Reuters

With stocks mired in multi-year lows and the fate of General Motors and banks hanging in the balance, investors are not expected to curb their flight from risk this week, putting Wall Street on track for another brutal sell-off.

One focal point will be a meeting between the US auto task force and GM, Chrysler and officials from the United Auto Workers in Detroit this week after auditors raised doubts about GM's ability to survive outside bankruptcy.

Uncertainty over the plan to salvage banks will also hang over the struggling sector until more concrete details from Washington are revealed, leaving investors to fret that companies that were once pillars of the financial system will have to be nationalised.

The weak economy is expected be confirmed by a handful of economic reports, including a government report on February retail sales and a survey of consumer sentiment.

"There are, unfortunately, no guideposts to a lot of the market to allow investors to get a better sense of direction of where the market is going, where corporate America is going," said Jack Ablin, Chief Investment Officer at Harris Private Bank in Chicago. "Short of that, we're going to likely have to rely on Washington. Unfortunately, it just seems like Washington's relationship with the stock market is strained."

With the Dow Jones and Standard & Poor's trading at 12-year lows, and the Nasdaq sliding to six-year lows, market watchers will be looking for signs of whether a bottom has been found, or if indexes still have another leg down to go. Last week was the fourth one of declines for all three major US stock indexes, as the Dow industrial average dropped 6.2 per cent and the Nasdaq composite index fell 6.1 per cent. The S&P's 500 slid seven per cent, its worst week since November.

"I've been in the business since 1963 and I've never seen a market that is so discouraging or painful," said Carl Birkelbach, CEO of Birkelbach Investment Securities in Chicago.

Already cheap bank stocks continued their tumble last week. The stock price of Dow component Citigroup, once the world's most valuable bank by market capitalisation, fell under $1 (Dh3.67) for the first time, reigniting anxiety over the bank's health and that of the entire banking sector. Clarity on how toxic assets will be cleared off banks' balance sheets and how those assets will be valued is key to stabilising the financial sector and seeing markets manage a sustainable recovery, analysts said.

"In order to move forward, we need [Treasury Secretary Timothy] Geithner to come out and tell us the answer to the question: 'How do you value the assets?'," said Marc Pado, US market strategist at Cantor Fitzgerald & Company in San Francisco.

Members of the US autos task force will visit Detroit next week to meet with GM, Chrysler and officials from the United Auto Workers labour union, an official for the Obama administration said on Friday.

GM's failure could trigger round of massive layoffs and hurt companies that supply and manufacture parts, said Joseph LaVorgna, chief US economist at Deutsche Bank in New York. In all, GM's bankruptcy could lop off four percentage points from the US GDP, of which two-thirds is driven by consumer spending, he said.

Ahead of the Fed's policy-making meeting the following week, Federal Reserve Chairman Ben Bernanke is set to address the Council on Foreign Relations tomorrow. Investors will be watching for any comments on the state of the economy and the outlook for banks.

Economic data on February retail sales on Thursday and a preliminary reading on March consumer sentiment on Friday, coupled with quarterly results from Staples Inc on Wednesday, should give a gauge of consumer spending.