The largest exchange traded fund tracking the U.S. financial sector was in the red Friday after JP Morgan (NYSE: JPM) revealed a $2 billion loss attributed to a trader known as the “London Whale.”
The sector ETF pared its 2% premarket decline and was lower by 0.7% at last check.
JP Morgan shares were down 8%. The stock is the second-largest holding in the $6.4 billion Financial Select Sector SPDR (NYSEArca: XLF) at 8.6% of the portfolio.
The bank said its chief investment office has suffered $2 billion in losses in its synthetic credit portfolio so far in the second quarter.
“Based on management’s statements that this synthetic credit-related hedge has been marked to market, we would assume that the full existing loss content currently embedded in this position has been realized,” Guggenheim Securities analysts said in a note. “While this position can experience incremental losses related to future market volatility, there shouldn’t be unrealized losses remaining hidden on the balance sheet.”
The JP Morgan surprise raises questions about the health and regulation of U.S. banks, which have been outperforming the broader market in 2012. XLF is up 15.6% year to date, compared with an 8.9% gain for iShares S&P 500 (NYSEArca: IVV).
The bank said that it could face another $1 billion in losses in the second quarter due to market volatility.
“While the announcement on its surface is shocking, especially considering J.P. Morgan’s stellar reputation when it comes to risk controls, we do not anticipate the losses will be material to JP Morgan’s long term fair value,” said Morningstar analyst Erin Davis. “We are, however, monitoring the situation closely for signs that this could be an early indication of larger problems at the bank.”
Financial Select Sector SPDR
