Eurozone contagion fears drive US bank sell off

A warning from Fitch Ratings that US banks are vulnerable to contagion from the eurozone debt crisis trigerred a late sell-off on Wall Street.

“Unless the eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for US banks will darken,” Fitch analyst Joseph Scott wrote.

The financial sector of the S&P 500 tumbled 2.5 per cent, led down by Morgan Stanley , which fell 8 per cent to $14.66.

Goldman Sachs fell 4.2 per cent to $95.60, Citigroup was off 4.1 per cent to $26.86, Bank of America fell 3.8 per cent to $5.90, and JPMorgan fell 3.8 per cent to $31.47.

In another sign of rising financial contagion, the two year interest rate swap spread over Treasuries, which is seen as a proxy for US bank counterparty risk, rose above 50 basis points for the first time since May 2010.

Earlier, the S&P 500 had moved slightly positive, as soild industrial production and housing market data added to a sense that US markets were shaking off eurozone shackles. But the benchmark US index eventually closed down 1.7 per cent to 1,236.92.

“Its very frustrating. We’re trying to shift back to a US-centric analysis, but this Fitch report has brought the eurozone back into focus,” said Phil Orlando, chief investment officer at Federated Investors.

The Dow Jones Industrial Average was off 1.6 per cent to 11,905.97, and the Nasdaq Composite index fell 1.7 per cent to 2,639.61.

Elsewhere on Wednesday, companies along the hard drive supply chain were given a boost, after Western Digital Corp , the single largest manufacturer, said it had reached a deal with Japanese electronics manufacturer TDK to buy “heads” – a crucial component in hard drives, which Western Digital has had trouble manufacturing since it closed factories due to flooding in Thailand last month.

Western Digital shares closed up 7.1 per cent to $26.82, also boosted by a report that the European Commission will clear the company’s bid to acquire Hitachi’s hard drive unit.

“This is a big deal as heads were the biggest challenge to restarting production,” said Jayson Noland, a tech analyst at Robert W Baird, “but it’s impossible to quantify the impact until we get details on the deal from Western,” he cautioned.

Quarterly results from Dell were more sobering for the sector, with revenue from sales of personal computers, still the single largest source of demand for hard drives, falling 4 per cent year-on-year.

Dell shares were off 3.2 per cent to $15.13, although some analysts were encouraged by signs of strong growth in storage and enterprise services.

“The company seems to be executing its plan to transform into higher value and higher margin areas,” said Jeffrey Fidacaro at Susquehanna.

Semiconductor manufacturer Micron Technology surged 23.4 per cent to $6.74, after a jury dismissed claims that the company had colluded with Korean firm Hynix Semiconductor to fix the prices of computer memory chips.

The case had been brought by Rambus , a tech innovation company, which had been seeking more than $4bn in damages.

The market capitalisation of Rambus, which relies on aggressive litigation to protect its patent rights, collapsed, falling more than 60 per cent to $7.11.

“Following two key legal losses, which we believed were the cornerstone to our investment thesis in Rambus, we are now recommending investors exit positions,” Jeff Schreiner, an analyst at Capstone investments, told clients as he dropped coverage of Rambus after the decision.

Midwestern oil refiners took a hit, as the discount of WTI crude oil to Brent crude shrunk to its lowest in more than six months.

Western Refining Inc fell 13.5 per cent to $13.42, and CVR Energy tumbled 16.3 per cent to $18.38. Both companies are almost exclusively dependent on WTI, which has sold at a steep discount to Brent for most of the year, as transport constraints created a supply glut at the WTI terminal in Cushing, Oklahoma.

News that Canadian firm Enbridge will allow WTI crude to flow to the Gulf Coast from Cushing through a newly acquired pipeline next year erased much of that discount.

Even refiners with a small exposure to WTI were significantly affected.

Shares in Tesoro fell 6.9 per cent to $25.00. WTI only accounts for 20 per cent of Tesoro’s crude, but Citigroup had expected that output to produce 60 per cent of 2012 earnings because of the lower input costs.

The share prices of refiners with as little as 15 per cent exposure to WTI crude, such as Valero Energy, have seen strong correlation with the Brent-WTI spread this year, at least until August, when they were caught up in the wider market sell off. Valero fell 9.3 per cent to $22.56 on Wednesday.

Abercrombie & Fitch plunged 13.6 per cent to $48.10, after third-quarter results badly disappointed analysts. Earnings per share of 56 cents were a full 15 cents lower than the average analyst expectation in a Bloomberg poll.

Autodesk rose 4.5 per cent to $35.58, after the design software maker reported third-quarter profit of 44 cents a share, exceeding analyst estimates, despite worries about that business would cut back on spending given global growth concerns.