Benchmarks suffered their biggest losses in months on Thursday, following a default by Argentina, and a spike in US labor costs. Concerns about the European economy and Russia-Ukraine crisis also dragged the S&P 500 below a key technical level and the Dow dropped more than 300 points. Both these indices snapped their five-month streak of gains, while Nasdaq ended in negative territory for the month.
For a look at the issues currently facing the markets, make sure to read today’s Ahead of Wall Street article
The Dow Jones Industrial Average (DJI) dropped 1.9%, or 317 points, to close Thursday’s trading session at 16,563.30. The Standard & Poor 500 (S&P 500) declined 2.0% to finish at 1,930.67. The tech-laden Nasdaq Composite Index closed at 4,369.77; declining 2.1%. The fear-gauge CBOE Volatility Index (VIX) surged 27.2% to settle at 16.95. This was the VIX’s highest daily close since mid-April. Total volume on the New York Stock Exchange (NYSE) was about 4.2 billion. Decliners outpaced advancing stocks on the NYSE. For 89% stocks that declined, 9% advanced.
The blue-chip index tumbled 317 points, its biggest one-day drop since Feb 3.The S&P 500 also registered its steepest one-day percentage drop since Apr 10. The S&P 500 closed below its 50-day moving average, since Apr 15. Selling accelerated once the key technical level was breached. Currently, the S&P 500 is about 2.4% below its all-time closing high of 1,987.98.
Standard & Poor’s downgraded Argentina’s credit rating to "selective default" after the government failed to pay interest on $13 billion of restructured bonds within the deadline. This was the second time Argentina defaulted in 12 years. The South American country failed to pay its debt of $539 million to bondholders after a U.S judge ruled that the country can’t make debt payments until and unless hedge funds led by Elliot Management Corp. get their money.
Earlier, Argentina had failed to make debt payments to the hedge funds. The group of hedge funds had sued Argentina for $1.5 billion. Talks between the group of hedge funds and the government collapsed late Wednesday.
Meanwhile in Portugal, shares of Banco Espirito Santo SA plunged almost 40% after its plans to raise capital without government aid was dented after incurring huge losses.
Ongoing geopolitical tension also kept investors jittery on Thursday. Russia banned import of soy from Ukraine. Russia is contemplating possible restriction on importing Greek fruits and U.S. poultry. On Tuesday, the U.S. and the European Union had expanded economic sanctions against Russia.Meanwhile, investors were concerned about a possible rise in wage inflation, on the backdrop of a strong rebound in second-quarter GDP. However, the Federal Open Market Committee (FOMC) in its two-day policy meeting allayed fears of a possible hike in interest rates. The FOMC trimmed the bond buyback plan but gave no hints about the timing of an increase in the federal funds rate.
Markets also received discouraging economic data. Chicago PMI numbers were disappointing as the Survey by Institute for Supply Management-Chicago noted that Chicago Business Barometer declined to 52.6 in July from June’s reading of 62.6. This was in contrast to the consensus estimate of an increase to 63.0. This was also the index’s lowest reading since Jun 2013.
Separately, the U.S Department of Labor reported that seasonally adjusted initial claims increased 23,000 to 302,000 in the week ending Jul 26. In the second-quarter, U.S. labor costs registered the highest gains in more than five and a half years.
On the earnings front, Akamai Technologies, Inc. (AKAM - Analyst Report) reported second-quarter 2014 earnings of 46 cents per share, in line with the Zacks Consensus Estimate. Shares of Akamai Technologies dropped 2.8%.
Among energy stocks, Exxon Mobil Corporation (XOM - Analyst Report) posted second-quarter 2014 earnings of $2.05 per share, beating the Zacks Consensus Estimate of $1.91. ConocoPhillips (COP - Analyst Report) reported second-quarter 2014 adjusted earnings of $1.61 per share, beating the Zacks Consensus Estimate by a penny. Occidental Petroleum Corporation (OXY - Analyst Report) reported second-quarter 2014 adjusted earnings of $1.79 per share, more than the Zacks Consensus Estimate of $1.75.
However, shares of Exxon Mobil, ConocoPhillips and Occidental Petroleum decreased 4.2%, 2.5% and 0.4%, respectively. The Energy Select Sector SPDR (XLE) declined almost 2.2%, the highest among the S&P 500 sectors. All 10 sectors of the S&P 500 ended in the red.
Shares of Yelp, Inc. (YELP - Snapshot Report) plummeted 11.2% after the company added lower number of local based advertisers than year-ago quarter. Shares of Yum! Brands, Inc. (YUM - Analyst Report) went down 4.9% after the company said illegal activities involving a Chinese supplier had a negative impact on its sales figures for the last couple of weeks. Shares of Wells Fargo & Company (WFC - Analyst Report) dropped 2.3% a day after the company lowered its 2014 outlook for the fourth time.
For the month, benchmarks ended in the red zone. The S&P 500 and the Dow suffered their first monthly decline since January. The S&P 500 and the Dow declined 1.5% and 1.6%, respectively. The Nasdaq dropped 0.9%.
Benchmarks settled in the red for the month after escalating geopolitical tensions including the ones in Gaza and Ukraine unnerved investors. Benchmarks suffered their biggest losses in months on reports that a Malaysian Airlines passenger jet was shot down near Ukraine-Russian border. Concerns about the European banking system also dragged domestic benchmarks lower.
Benchmarks were also negatively impacted after a Fed monetary policy report sparked concerns about “substantially stretched valuations” in Internet and bio-tech stocks. Additionally, Federal Reserve Chairwoman Janet Yellen’s comment that federal funds rate might be raised sooner if the labor market keeps surprising the central bank dented investor sentiment.
Dismal corporate results by Caterpillar Inc. (CAT - Analyst Report), General Motors Company (GM - Analyst Report) and DR Horton Inc. (DHI - Analyst Report) also weighed on benchmarks. Analysts also took a dim view of The Boeing Company’s (BA - Analyst Report) results as they were concerned about the company’s cash flow and the rise in cost of its military tanker program.
Among the positives, Facebook, Inc. (FB - Analyst Report), Ford Motor Co. (F), Apple Inc. (AAPL) and Biogen Idec Inc. (BIIB), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), The Goldman Sachs Group, Inc. (GS), Intel Corporation (INTC), Morgan Stanley (MS) and UnitedHealth Group Incorporated (UNH) reported upbeat quarterly performances. Earnings results from Chipotle Mexican Grill, Inc. (CMG), Comcast Corporation (CMCSA) and Verizon Communications Inc. (VZ) were also encouraging.
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