On Wednesday, benchmarks closed in the red after European
concerns once again dominated proceedings. Alongside Spain's rising
bond yields, Italy became the latest flashpoint after its borrowing
costs also sprung sharply higher. Cyprus' finance minister further
intensified concerns after he spoke about the possibility of
seeking a bailout for the nation. Domestic developments too were
hardly encouraging, as retail sales data dropped for the second
The Dow Jones Industrial Average (DJI) dropped 0.6% to close at
12,496.38. The Standard & Poor 500 (S&P 500) was down to
1,314.88, after plunging 0.7%. The tech-laden Nasdaq Composite
Index lost 0.9% and finished yesterday's trading session at
2,818.61. The fear-gauge CBOE Volatility Index (VIX) gained 9.9%
and settled at 24.27. It was a busy day on the Street as
consolidated volumes on the New York Stock Exchange, Nasdaq and
American Stock Exchange amounted to roughly 7.1 billion shares,
higher than the 20-day moving average. Declining stocks outpaced
the advancers on the NYSE; as for 66% stocks that dropped, 31%
stocks moved up.
Benchmarks opened in the red but had strayed into the green for
a brief period, before slumping further. Markets hardly had
anything positive to cling on to as the lingering tension ahead of
the Greek vote this weekend is constantly playing in the investors'
mind. The nation had failed to form a government following the
elections in late April. Throughout May, there were apprehensions
that Greece, which has no government to negotiate a bailout
package, would eventually exit the euro.
Concerns are being further intensified now as the nation
prepares to go to polls for the second time in less than two
months. What most investors are worried about are rumors of an
anti-bailout party securing a majority to form the government. In
that event, the nation would have to exit the euro, which would
have far reaching effects on global markets. These concerns were
reflected in bank deposits shrinking by €500-€800 million daily in
the last few days ahead of the vote. A banker, who wished to remain
anonymous said: "This includes cash withdrawals, wire transfers and
investments into money market funds, German Bonds, U.S. Treasuries
and EIB bonds". The nation had started withdrawing money from banks
and was hoarding non-perishable food items instead.
Meanwhile, Cyprus also seems to be in need of a bailout and the
nation's finance minister has said this was needed to support banks
ahead of Greece's election. Cyprus is dependent on Greek results as
the Cypriot banks' Greek branches might fast lose its deposits if
Greece exits the euro. Fears of Greece exiting euro also forced
Moody's to chop Cyprus' rating by two notches to Ba3. Also,
Egan-Jones Ratings Co and Moody's Investors Service downgraded
Spain's ratings. Moody's downgraded Spain from A3 to Baa3 and
Egan-Jones, in its fourth downgrade in six weeks, reduced Spain's
rating to CCC+ from B-.
Europe had more negatives to share and Italy has now been added
to the list of nations suffering from inflating borrowing costs.
The 10-year bond yield had sprung to 6.1% from 6.02%. For the
yields on 12-month bonds, the nation had to shell out an interest
rate of 3.972%, up from last month's 2.34%. Italy's incremental
bond yields came to light a day after Spain recorded its highest
euro-era borrowing costs. On Tuesday, the 10-year Spanish bond
yield touched a high of 6.83% before moving down marginally, thus
recording its highest level since Spain entered the euro.
Yesterday, Spain's 10-year borrowing cost jumped further and
settled at 6.71%. It is moving closer to the 7% rate, which is
considered to be an 'unsustainable level'. We have noticed in the
recent past that European nations with a 7% borrowing rate
ultimately had to seek bailouts.
With cross-Atlantic tensions taking a toll, investors also
failed to find any respite from the domestic arena. The U.S.
Department of Commerce noted "that advance estimates of U.S. retail
and food services sales for May, adjusted for seasonal variation
and holiday and trading-day differences, but not for price changes,
were $404.6 billion, a decrease of 0.2 percent (±0.5%) from the
previous month". This was the first time in two years that retail
sales dropped for two consecutive months. The drop was also wider
than consensus estimates, which projected a 0.1% decline.
The retail sector took a hit following the report and the SPDR
S&P Retail (XRT) dropped 2.8%. As for the retail stocks, Costco
Wholesale Corporation (NASDAQ:
), Wal-Mart Stores, Inc. (NYSE:
), PriceSmart, Inc. (NASDAQ:
), Expedia Inc (NASDAQ:
), Hibbett Sports, Inc. (NASDAQ:
), Macy's, Inc. (NYSE:
) and Dillard's, Inc. (NYSE:
) lost 1.2%, 1.0%, 1.5%, 2.7%, 3.1%, 4.5% and 2.8%,
COSTCO WHOLE CP (COST): Free Stock Analysis
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