News of Spain's borrowing costs reaching an 'unsustainable
level' was among the global economic woes that dragged domestic
markets to their third straight day of losses ahead of the
unofficial kick off of the earnings season. Among other negative
global factors, Japan witnessed a record pace of decline in
machinery orders in May and China's inflation rate was at a
29-month low.
The Dow Jones Industrial Average (DJI) dropped 0.3% to close at
12,736.29. The Standard & Poor 500 (S&P 500) was down 0.2%
and finished yesterday's trading session a couple of points lower
at 1,352.46. The tech-laden Nasdaq Composite Index also slipped
0.2% and ended at 2,931.77. The fear-gauge CBOE Volatility Index
(VIX) gained 5.2% to settle at 17.98. Volumes continued to be among
the year's lightest as consolidated volumes on the New York Stock
Exchange, the Nasdaq and Amex were roughly 5.1 billion shares,
sharply lower than the year-to-date daily average of 6.85 billion
shares. Declining stocks moved ahead of advancing stocks; as for
54% stocks that declined, 43% stocks closed higher.
Few developments occurred on the domestic front, and the day was
largely dominated by global factors. Unfortunately, almost all of
them were negative. Just over a week ago, investors cheered the
"breakthrough deal" by European leaders that allowed the permanent
bailout fund to directly infuse money into the banks. It also
agreed that a single supervising institution would be set up that
would oversee the banks across the Euro-zone. However, the cheer
seems to have faded now as both Spain and Italy have witnessed an
uptrend in borrowing costs, once again reminding investors of the
serious financial woes the nations are going through.
Yesterday, concerns were all the more intensified as Spain's
10-year yields surpassed the 7% mark, which is considered to be at
an 'unsustainable level'. Ten-year yields had moved to a high of
7.108% before slipping somewhat to 7.06%. Investor fears following
the surge were justified as historical trends have shown that
nations with such high borrowing costs had to ultimately seek
bailouts. Ireland, Greece and Portugal are those which have
followed a similar trend. Meanwhile, Italy too witnessed inflated
borrowing costs yesterday.
Developments in Asia also spread panic as machinery orders
declines in Japan and China, the world's second-largest economy,
hinted at a gloomy state of economic affairs. Machinery orders
slumped 14.8% in May in Japan, the biggest fall since April 2005.
China's consumer price index (CPI) registered a 2.2% increase,
indicating the slowest pace of growth since February 2010. These
dismal global reports sparked off fears that the gloomy European
financial situation might have a wider impact. Also, the data
hinted at slowing demand.
Talking about slowing demand, more particularly amidst the
lingering financial crisis in Europe, investors may be apprehensive
about the upcoming domestic earnings season. Strategists are not
too hopeful about second quarter corporate results. For example,
Jonathan Golub, chief strategist at UBS in New York was quoted by
Reuters as saying: "We expect the tone of earnings season to be
quite negative". Alcoa, Inc. (NYSE:
AA
) was slated to unofficially kick start the earnings season after
the closing bell.
Also this week, two financial bellwethers JPMorgan Chase &
Co. (NYSE:
JPM
) and Wells Fargo & Company (NYSE:
WFC
) are due to report their earnings results. The financial sector
had a poor run yesterday and the Financial Select Sector SPDR (XLF)
slipped 0.1%. Bank of America Corporation (NYSE:
BAC
), Citigroup, Inc. (NYSE:
C
), The Goldman Sachs Group, Inc. (NYSE:
GS
) and Morgan Stanley (NYSE:
MS
) were among the decliners and they lost 1.3%, 1.0%, 1.1% and 1.5%,
respectively.
On the economic front, the Board of Governors of the Federal
Reserve System reported the fastest pace of growth in consumer
credit in five months, which has increased by $17.1 billion.
Consensus estimates had projected an increase by $8.7 billion.
Also, the $8 billion jump in revolving credit was the highest since
November 2007.
BANK OF AMER CP (BAC): Free Stock Analysis
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CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
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MORGAN STANLEY (MS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
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