Banks gain on US economic optimism

BANKS led Wall Street to gains yesterday even as Europe struggled again, a sign investors are betting a relatively strong US economy will help US stocks outperform other markets.

Overall gains were small, but banks advanced for a third day, supported by better-than-expected economic data.

US financial shares continued to delink from their European peers as investors see more potential for growth in US lending that could offset worries about the Eurozone debt crisis.

The KBW bank index rose 2.2 per cent, extending the week’s advance to about six per cent. Bank of America jumped 8.6 per cent to $6.31.

“While you do have the European issues, the US banks do have some offsets,” said John Manley, the New York-based chief equity strategist at Wells Fargo Funds Management. “There are signs of potential stability in the housing market and US banks are probably being helped by that.”

Traders initially focused on heavy losses in European bank shares, led by UniCredit. Italy’s largest bank has lost more than 30 per cent of its value this week after it priced a share offering meant to shore up its ravaged balance sheet. Other European bank shares fell, and an index of the region’s lenders tumbled 3.24 per cent.

But Manley warned that the problems with bank stocks still linger. Bank stocks “can do well in the very long term, they are cheap stocks, but they are cheap for reasons that will not go away any time soon,” he said.

The Dow Jones industrial average dipped 2.72 points, 0.02 per cent, to 12,415.70. The S&P 500 Index gained 3.76 points, 0.29 per cent, to 1,281.05. The Nasdaq Composite added 21.50 points, 0.81 per cent, to 2,669.86.

Data yesterday pointed to a strengthening US economy. More than twice the expected number of private sector jobs were added in December while initial jobless claims dropped 15,000 in the latest week. In addition, the pace of US services growth quickened more than expected in December.

The S&P 500 closed above its 200-day moving average for a third straight day. It was the first time the index has been able to hold above the moving average that long in five months. But relatively low volumes could undermine the upbeat technical picture.

The S&P retail index edged up 0.4 per cent as December same store sales rose slightly more than expected, though discounts cut into profits over the holiday shopping season. Target fell three per cent to $48.51 while Macy’s added 3.9 per cent to $33.92.