JPMorgan Chase's derivatives trading blunder will weigh on financial stocks Friday and could be a negative for markets as traders sort out the impact.
Markets are also watching Europe, where Greece continues to try to form a government and Spain will announce bank reform, which may show its financial institutions in need more capital. Spain agreed to nationalize troubled Bankia earlier in the week.
On the data front, there is little, but PPI producer inflation data is at 8:30 a.m. and consumer sentiment is released at 9:55 a.m. Investors will be interested in China’s data, released overnight on retail sales, industrial production and inflation.
But JPMorgan , which suffered a major black eye, will be a big focus after it revealed after the market close Thursday that it suffered $2 billion of derivatives trading losses in the last six weeks and could be subject to another $1 billion in losses. Shares of JPMorgan, viewed as the best of breed bank stock, fell more than 6.5 percent afterhours, and other major banks fell with it.
Stocks had rebounded slightly Thursday, with the Dow 19 points higher at 12,855, in its first up day in seven. The S&P 500 was up 3 at 1,357, but Nasdaq was down 1 at 2,933. Stock futures fell after the JPMorgan news.
’’I think the market opens near Wednesday’s low, around 1343 (S&P),” said Scott Redler of T3Live.com. “The market was waiting to see whether Greece can put together a government but even if some good news comes out of Europe, the attention is going to come back to the U.S. because of JPMorgan.”
JPMorgan CEO Jamie Dimon held a conference call after the announcement of the bad derivatives bets by its Chief Investment Office. He called the synthetic hedge, which used credit default swaps, a kind of insurance contract, “poorly executed” and “poorly monitored.” He said the bank has an extensive review underway and has already found “many errors” and “bad judgment.”
Asked if other banks could see the same type of losses, Dimon said: “Just because we’re stupid doesn’t mean everyone else is.”
JPMorgan estimated its losses at the unit at $800 million, and said trading losses had been offset by $1 billion in gains from the sale of securities. JPMorgan is still on track to earn $4 billion for the quarter.
“I think this thing in relation to other things going on is small. Size is not overwhelming as far as the fundamentals,” said James Paulsen, chief investment strategist at Wells Capital Management. “The fall out is — What does this mean of the regulatory furor in this country that already has been heavy handed for the last several years, and might have been starting to decay a little bit? This raises it up a little bit again.”
“It’s hard to believe in the shadow of MF Global and with the heavy regulatory environment that exists,” said Paulsen.
JPMorgan and other institutions have been bristling against the stricter regulation of proprietary trading coming with the so-called Volcker rule, which aims to reduce risk taking by banks.
Redler, who follows the market’s short term technicals, said the news, combined with other negatives, could help send stocks lower, through a next tier of support levels.
“Earlier this week, a head and shoulders topping pattern triggered when we went below 1,360 (S&P), so the measured move of the pattern … would take the S&P down to about 1,300. Points traders will be watching along the way are Wednesday’s intraday low of 1,343 and then 1,320,” he said.
Redler said Thursday’s trading was lethargic and unconvincing, and the market appeared to be setting up for another selloff.
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