Fed Chairman Ben Bernanke once again dashed hopes of further
economic stimulus and an early rally faded to leave the Dow only
slightly higher, while the S&P 500 and Nasdaq closed in the
red. Bernanke's congressional testimony also curbed the optimism
that was sparked by China's interest rate cut. Markets had been
buoyed by the first drop in initial claims in almost a month,
before Bernanke's comments somewhat dented sentiment.
The Dow Jones Industrial Average (DJI) ended 0.4% higher at
12,460.96. The Standard & Poor 500 (S&P 500) edged down
marginally, by 0.01% to close almost unchanged at 1,314.99. The
tech-laden Nasdaq Composite Index dropped 0.5% to finish
yesterday's trading session at 2,831.02. The fear-gauge CBOE
Volatility Index (VIX) dropped almost 2.0% to settle at 21.72.
Consolidated volumes on the New York Stock Exchange, the Nasdaq and
the American Stock Exchange were roughly 7.16 billion shares,
higher than the year-to-date daily average of 6.85 billion shares.
Decliners enjoyed a better run than the advancing stocks on the
NYSE; as for 53% of stocks that traded lower, 44% moved up.
Markets had opened decently higher, buoyed by China's interest
rate cut and encouraging domestic labor data. The Chinese central
bank announced that it was slashing its benchmark one-year lending
and one-year benchmark deposit rates by 0.25% to 6.31% and 3.25%,
respectively. The People's Bank of China made such a move for the
first time since 2008 and it is widely perceived that monetary
authorities are gearing up to stimulate the economic growth. Given
that the world's second-largest economy is bolstering measures to
counteract the recent gloom in global financial markets, benchmarks
opened higher.
Moreover, benchmarks were boosted by the first drop in first
time unemployment benefit claims after three consecutive increases.
The U.S. Department of Labor reported that the advance figure for
seasonally adjusted initial claims declined 12,000 from the
previous week's revised figure of 389,000 to 377,000 for the week
ending June 2. The decline in initial claims was also wider than
consensus estimates of 379, 000.
Following these positive developments, benchmarks were trading
higher and the Dow had gained nearly 140 points. Amidst such
optimism, the spotlight was on Federal Reserve Chairman Ben
Bernanke, as investors hoped to hear of some form of quantitative
easing (QE) in his congressional testimony. However, in his
testimony before the Congress's Joint Economic Committee, Bernanke
said the central bank was "prepared to take action as needed to
protect the U.S. financial system and economy in the event that
financial stresses escalate". Thus, he dashed hopes of immediate
economic stimulus, which investors have been expecting for a long
time.
Separately, Bernanke also highlighted two major causes for
concern, the labor market and the European crisis. Speaking about
the labor market, he said: "The key question… (is) will economic
growth be sufficient to achieve continued progress in the labor
market". Regarding the European crisis, Bernanke added: "The
situation in Europe poses significant risks to the U.S. financial
system and economy and must be monitored closely".
Investors' hopes regarding additional economic stimulus was
previously propelled by comments from Atlanta and San Francisco Fed
presidents. Earlier this week, Atlanta Fed President Dennis
Lockhart had said: "Should it become clear that something
resembling my baseline scenario of continued, though modest, growth
is no longer realistic, further monetary actions to support the
recovery will certainly need to be considered". Separately, San
Francisco Fed President John Williams had lent further support to
this argument, emphasizing the impact of the European crisis. He
said: "It's crucial that we maintain our current highly stimulatory
monetary policy stance…We must also stand ready to do even more if
needed to best achieve our statutory goals of maximum employment
and price stability".
After all those hopes were dashed yesterday, benchmarks
underwent a slide and the Nasdaq emerged as the biggest loser among
them. The technology sector had a bad run yesterday, somewhat
justifying the Nasdaq's fall, and the Technology Select Sector
(XLK) was down 0.6%. Among the losers, Dell Inc. (NASDAQ:
DELL
), Google Inc (NASDAQ:
GOOG
), Oracle Corporation (NASDAQ:
ORCL
), Microsoft Corporation (NASDAQ:
MSFT
) and Adobe Systems Incorporated (NASDAQ:
ADBE
) slumped 0.7%, 0.4%, 1.3%, 0.4% and 1.2%, respectively.
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