Edward Krudy

Stocks looked to open down on Monday with financial shares set to drag on concern that a push by some banks to repay government bailouts may divert funds away from an economic recovery.

Additionally, a continued rise in bond yields could be a significant headwind as rising interest rates may boost borrowing costs for consumers and businesses.

The Obama administration is expected to announce a higher-than-expected number of big banks will be allowed to repay their Troubled Asset Relief Program (TARP) funds, the Washington Post reported. The newspaper said the size of the repayments may be twice the initial estimate of $25 billion.

Before the bell, shares in Bank of America Corp fell 1.2 percent to $11.72 in premarket trade, while JPMorgan Chase & Co dropped 0.7 percent to $34.30. The Financial Select Sector SPDR exchange-traded fund dropped 1.5 percent.

Overall I don't think it (banks repaying bailout funds) is a real plus for the market or for the economy, said Marc Pado, U.S. market strategist at Cantor Fitzgerald in San Francisco. They are choosing to repay TARP rather than rebuild their business. In terms of the economic recovery it's an obstacle.

The U.S. 10-year Treasury note's yield has climbed near 4 percent, while 2-year U.S. Treasury yields hit 7-month highs on Monday.

This is a real and lasting turn in rates higher, and this will have an impact on mortgages. It will slow the pace of mortgage financing, added Pado.

S&P 500 futures fell 6.6 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones Industrial Average futures slid 66 points, while Nasdaq 100 futures dropped 16.00 points.

McDonald's Corp warned that second-quarter profit could be reduced by 8 cents to 9 cents a share if foreign exchange rates remained around current levels. The company reported a 5.1 percent increase in May sales at restaurants open at least 13 months. Shares in the fast-food chain fell 3.4 percent to $57.85.

On the technology front, JP Morgan cut its second-quarter revenue forecast for the server segment, pointing to increased downside risk to operating estimates for International Business Machines Corp , Hewlett-Packard Co , Dell Inc and Sun Microsystems Inc .

U.S. stocks ended mixed on Friday, with the major indexes going in different directions as investors considered conflicting signals in monthly U.S. jobs data. Investors sold recent winners to book gains from the spring rally, which has lifted the S&P 500 by almost 40 percent from its 12-year closing low on March 9.

(Reporting by Edward Krudy; editing by Jeffrey Benkoe)

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