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Investors ignored news of Spain receiving a bailout soon after the morning’s rally, and the markets thereafter reversed course to end sharply lower on Monday. Investors were once again worried about Europe’s financial condition, as many were doubtful about how far Spain’s bailout would go to tackle the lingering debt woes. Meanwhile, Spain’s borrowing costs jumped and the Dow ended its four-day winning run.
The Dow Jones Industrial Average (DJI) declined by 1.1% or 142.97 points to close the day at 12,411.23. The Standard & Poor 500 (S&P 500) lost 1.3% and finished yesterday’s trading session at 1,308.93. The tech-laden Nasdaq Composite Index slumped 1.7% or 48.69 points to end significantly lower at 2,809.73. The fear-gauge CBOE Volatility Index (VIX) jumped almost 11% to settle at 23.56. Volumes were once again light, as consolidated volumes on the New York Stock Exchange, Nasdaq and American Stock Exchange were 6 billion shares, almost 14% lower than the 10-day moving average. Declining stocks far outnumbered the advancing ones; as for 77% of the decliners, a mere 20% stocks could move up.
Readings at the end of the day are in sharp contrast as to how the day had started. All the benchmarks were trading considerably higher and the Dow was close to a three-digit gain. The fear-gauge was also in the red and looked set for a sixth-consecutive day of decline. The initial optimism was spurred by Spain securing a bailout worth €100 billion. Reports of Spain considering seeking a bailout had led to a decent rally last Friday. Investors were buoyed by the development, as Spain was needed to secure the bailout funds to recapitalize its troubled banks. The widespread belief was that economic uncertainties in Europe would decline significantly, at least for a while.
However, optimism arising out of Spain’s bailout deal soon faded as many investors were apprehensive about how far the bailout would go to solve the lingering financial woes of the region. Market onlookers believed that fundamental concerns were still not being addressed. An expert opined that Spain, Greece, Portugal and Ireland have all been provided with financial aid, but ‘nobody was dealing the structural problems’.
Moreover, investors grew jittery about the debt burden that was piling up on Spain. The country is already into a recession and the extra debt burden further afflicts the nations’ interest payment ability. Earlier in the day, Spain saw a downtrend in its borrowing costs as the 10-year bond yield slipped 17 points. However, it began soaring at a later stage and borrowing costs ultimately increased to 6.5%.
Coming to the domestic markets, the financial sector took a hit following the turn of events and the Financial Select Sector (XLF) lost 1.8%. Among the losers, Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS), UBS AG (USA) (NYSE:UBS) and Wells Fargo & Company (NYSE:WFC) dropped 3.7%, 4.7%, 2.6%, 2.5%, 3.1% and 1.4%, respectively.
Investors also remained worried about the upcoming Greek elections. The nation has failed to form a government earlier and increasing political uncertainty has led to skepticism about whether Greek will secure its next bailout and remain within the currency union. With re-elections scheduled on June 17, investors are concerned that if an anti-bailout party wins the race, Greece might be on its way out. As the nation goes to the polls this weekend, a survey late last month had sparked enough concerns by showing that an anti-bailout party would command a large enough majority to form a government if elections were held at that time.
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