ETF Trends
ETF Trends

Exchange traded funds tracking financial sector stocks took a blow as Morgan Stanley (NYSE: MS) analysts issued a warning on a double-dip recession and the Federal Reserve scrutinizes European bank branches.

Financial Select Sector SPDR Fund (NYSEArca: XLF) dropped almost 5% in afternoon trading as the Dow shed more than 400 points.

Morgan Stanley noted that the U.S. and Europe were “dangerously close to recession,” report Wallace Witkowski and Greg Morcroft for MarketWatch. The firm cut its global GDP growth projections from 4.2% to 3.9% for 2011 and from 4.5% to 3.8% for 2012.

“The main reasons for our growth downgrade, apart from disappointing incoming data, are recent policy errors in the U.S. and Europe plus the prospect of further fiscal tightening there in 2012,” said Morgan Stanley analyst Joachim Fels, according to the report. “This is eroding business and consumer confidence and has weighed down on financial markets.”

The Federal Reserve Bank of New York has been meeting with European lenders with U.S. branches to assess their vulnerability to the financial risks, specifically about the banks’ accessibility to the minimal amount of funds needed to stay operational, report David Enrich and Carrick Mollenkamp for The Wall Street Journal.

A senior executive at a major European bank who participated in the talks remarked on how the New York Fed was “very concerned” about European banks finding adequate funding.

Financial Select Sector SPDR Fund

For more information on the financials sector, visit our financial category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.