Financials Up, JPMorgan Brushes Off Projected $4.2 Billion Trading Loss (JPM, C, BAC, MS, WFC, XLF)

In a rare bit of good news, the ISM non-manufacturing index came in higher than expected this morning, at 53.7%, up 0.2% from April and the same amount above the consensus estimate. The price index fell from 53.6% to 49.8% and employment slowed from 54.2% to 50.8%. New orders were up from 53.5% to 55.5%.

Equity markets have noted the positive news and stocks rose sharply before giving the gains all back by 11 a.m. The financial sector led the rise, with JPMorgan Chase & Co. (NYSE: JPM) up 3%, Citigroup Inc. (NYSE: C) up 2.4%, Bank of America Corp. (NYSE: BAC) up 2.5%, Morgan Stanley (NYSE: MS) up 3.6%, and Well Fargo & Co. (NYSE: WFC) up 1%. The Financial Select Sector SPDR ETF (AMEX: XLF) is up 1.2%.

JPMorgan’s share price rise comes on the same day that an analyst at International Strategy & Investment Group Inc. (ISI) estimated that the bank may lose $4.2 billion in the second quarter as a result of the trading loss at its chief investment office. Combined with weak revenue from trading and international banking, ISI said EPS could come in at $0.65, compared with its earlier estimate of $0.93. The consensus estimate for the second quarter from Thomson Reuters is $0.88.

The ISM report was especially upbeat on new orders, citing respondents who reported, “Improving customer demand” and “Expecting strong sales for the rest of 2012.” Combined with comments about capital expansion in a variety of industries, investors might be looking at the banks more favorably, expecting lending to increase.

Another possible explanation for the financial sector’s pop today is almost diametrically opposed to an improving services sector. The staggering US economy may be in store for another dose of quantitative easing, always a good thing for the nation’s biggest banks.

The latter seems the likelier possibility. Whatever the reason, financials are keeping equities in positive territory as we approach noon today.

Paul Ausick