Stock Market Predictions
(Global Markets) - Morgan Stanley (MS.N) shares rallied on Friday, despite continued weakness in global markets, as analysts said that fears about its exposure to French banks were overblown and that the bank was prepared to manage risk.
At midday the stock had given up some early gains but was still up 3.7 percent, far outstripping the broader market. In the previous five trading sessions, the bank lost more than 21 percent of its value, reducing its market capitalization by more than $6.8 billion.
Other financial stocks also rose, after days of being slammed by the weak financial outlook and market malaise.
The KBW Bank Index .BKX rose 1.5 percent, led by a nearly 3.8 percent gain for Bank of America Corp (BAC.N). Most members of the broker-dealer index .XBD also rallied, led by Morgan Stanley and by a 4.3 percent gain for Jefferies Group Inc (JEF.N).
But even with the rally, there were signs the market was still not fully confident in Morgan Stanley's strength.
The cost to insure Morgan Stanley's debt in the credit default swap market jumped on Friday even as swaps on other U.S. banks came off their highs, with the cost to insure the company's bonds rising above that of Bank of America bonds for the first time since late August.
CDS costs to insure Morgan Stanley's bonds for five years were last up 39 basis points to 438 basis points, the highest level since March 2009, according to Markit. That means it would cost $438,000 per year to insure $10 million in debt for five years.
FRENCH FEARS
Like many other banks, Morgan Stanley has been hurt by fears of weak third-quarter performance, a gloomy economic outlook and a Federal Reserve plan to lower long-term interest rates that could compress margins.
The pressure increased Thursday with a post on the well-known finance blog "Zero Hedge" that said Morgan Stanley was at serious risk because of its exposure to French banks.
The blog said Morgan Stanley's French exposure was greater than its market capitalization and about two-thirds of its entire book value. French banks are some of the biggest victims of the panic in recent weeks about Greek debt and the effect a default would have on Europe.
Wall Street analysts were quick to rush to Morgan Stanley's defense. Bernstein Research's Brad Hintz -- himself a former treasurer of the company -- said Friday that Morgan Stanley's total exposure to France was probably less than $2 billion.
"We believe Morgan Stanley's risk management staff and its trading units are fully aware of the highly publicized risks emanating from Europe and warnings about the firm's potential exposure to a European Sovereign crisis," Hintz said in a note. "There is solid evidence that shows Morgan Stanley has been taking action to limit risk in preparation for potentially difficult market conditions ahead."
The Wall Street Journal reported that Credit Suisse also defended Morgan Stanley's French position in a note late Thursday, saying any risk to the bank in the euro zone was not a surprise and would be manageable.
The market also shrugged off an estimate change on Morgan Stanley. JMP Securities analyst David Trone cut his third-quarter profit forecast by 10 percent on expected losses in the bank's bond portfolio.
(Reporting by Ben Berkowitz in New York, additional reporting by Karen Brettell; Editing by Gerald E. McCormick and John Wallace)
