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.