New quarter, old subprime woes

NEW YORK (CNNMoney.com) -- U.S. stocks appeared set to get off to a rough start for new quarter as two major global banks reported new problems by subprime mortgages.

After being slightly higher in earlier trading, futures briefly fell into negative territory after 7 a.m. ET when Citigroup, the nation's largest financial firm, announced it would take a $3 billion charge for underperforming mortgage securities. It also warned it will see earnings per share fall by 60 percent in the just completed third quarter.

Shares of Dow component Citigroup (Charts, Fortune 500) were down 2 percent in pre-market trading just after the report. But S&P futures soon rebounded and were slightly higher at 7:56 a.m. ET, although a comparison to fair value still suggested a lower open for blue chips. Nasdaq futures remained lower.

Peter Cardillo, chief market economist, Avalon Partners, said there wasn't a bigger reaction to Citigroup's warning because the problem of subprime loans hitting banking sector results is something for which investors have been prepared.

"I think the market is already anticipating there will be a number of sour earnings there due to subprime," he said. "If that spreads to earnings warnings in other sectors, that will be the real negative."

Swiss bank UBS (Charts) also said it will take a $3.4 billion hit in the third quarter due to problems stemming from the subprime mortgage crisis. The bank also said it expects to post a quarterly pre-tax loss of up to $690 million and cut up to 1,500 jobs by the year end.

But rival Swiss bank Credit Suisse (Charts) said it expects to report a third-quarter profit of at least $860 million, or within its previously stated range of earnings, despite turmoil in the market.

In addition, NetBank (Charts), an online bank with $2.5 billion in assets, was shut down by the government Friday because of an unsustainable level of mortgage defaults. It was the largest U.S. bank failure since the savings and loan crisis more than 14 years ago.

Also weighing on stocks is a heavy week for the economic calendar that could determine if the Federal Reserve will continue its course of rate cuts. The reports start with the closely watched survey of manufacturing executives from the Institute of Supply Management. Economists expect the ISM reading for September will slip to 52.5 from 52.9, although any reading above 50 indicates growth in the sector.

The most closely watched report won't come until Friday, when the government releases its monthly employment report. Weakness in that report could give the Fed more reason to keep lowering rates. At the same time, it could also raise investors' recession fears.

In other corporate news, United Parcel Service (Charts, Fortune 500) reached an tentative agreement on an early labor pact with the Teamsters that will allow it to pull out of union-controlled multi-employer pension plans. That was the key negotiating goal that UPS failed to achieve in 1997 contract talks that resulted in a two-week strike, the longest work stoppage ever at the company.

Finnish cell-phone maker Nokia (Charts) is in talks to buy navigation-software maker Navteq (Charts), according to the Wall Street Journal.

In global trade, Japanese markets finished mixed. Hong Kong and Chinese stock markets were closed for a holiday. The news out of UBS hit the banking sector in Europe, where stocks struggled in early trading.

The dollar was lower against the euro, once again hitting a record low. But the greenback was higher versus the yen in early trading. Oil prices were higher in early trading.