US: Futures fall with banks poised to decline

NEW YORK - Stock index futures pointed to a lower market open on Friday with the U.S. financial sector in for another rocky session as talk swirled among traders of a possible profit warning by Merrill Lynch (MER.N).

European shares were broadly lower, led by drops in bank stocks, and S&P 500 futures were down as well.

A trader in London, speaking on condition of anonymity, said "rumors that Merrill are guiding down" were largely responsible for the move lower.

Shares of Merrill were down 3.8 percent at $36.25 in pre-market trading. A Merrill Lynch spokeswoman declined to comment.

In Europe, shares of Swiss bank UBS (UBSN.VX) and Royal Bank of Scotland (RBS.L) were down 3.6 percent each.

In a sign of increasingly bearish sentiment on Wall Street, short interest on the New York Stock Exchange jumped 7.4 percent in mid-June, rising to an all-time high, the exchange said on Thursday.

Short sellers targeted financial stocks in particular.

Short interest in both Washington Mutual (WM.N) and American International Group (AIG.N) climbed more than 23 percent. For the U.S.-listed shares of Switzerland's UBS (UBS.N), short interest nearly doubled.

Adding to pressure on the financials, analysts at Merrill Lynch said it sees dividend cuts at Bank of America (BAC.N), Regions Financial (RF.N), SunTrust Banks (STI.N) and Wachovia (WB.N).

Shares of Citigroup (C.N) fell on Thursday after the bank's chief financial officer told investors that it could have substantial write-downs in the second quarter. Earlier in the week, investment bank Lehman Brothers (LEH.N) posted its first-ever loss as a public company.

"There had been hope that the first quarter would be the bottom in terms of bad news from financials, but the news from Citigroup, Lehman and overseas banks indicate there will be more during the second quarter." said Jim Awad, chairman of W.P. Stewart & Co. Ltd in New York. "Now the question is: 'Will the second quarter be the end? Or will it spill over into the third?"'

S&P 500 futures slid 9.9 points, below fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Dow Jones industrial average futures fell 83 points, and Nasdaq 100 futures lost 15 points.

On Thursday, the Dow Jones industrial average (.DJI) rose 34.03 points, or 0.28 percent, to close at 12,063.09. The Standard & Poor's 500 Index (.SPX) gained 5.02 points, or 0.38 percent, to end at 1,342.83. The Nasdaq Composite Index (.IXIC) climbed 32.36 points, or 1.33 percent, to finish at 2,462.07.

(Agencies)