Stock Market News for July 2, 2012

Markets jumped to post record gains on Friday after the European Union summit reached a “breakthrough” deal promising to stabilize the region’s troubled banks and the lingering debt woes of the region. Benchmarks recorded their best June performance in over a decade, and S&P 500 and Nasdaq recorded their biggest gains this year. Even though indices put up a robust performance on the final day of the second quarter, they incurred losses for the period as a whole. This was primarily due to European worries and dismal economic readings.

The Dow Jones Industrial Average (DJI) jumped 2.2% and gained 277.83 points to close at 12,880.09. The Standard & Poor 500 (S&P 500) surged 2.5% and finished Friday’s trading session at 1,362.16. The tech-laden Nasdaq Composite Index soared 3% to jump to 2,935.05. The fear-gauge CBOE Volatility Index (VIX) slumped a sharp 13.3% to settle at 17.08. Consolidated volumes on the New York Stock Exchange, Nasdaq and American Stock Exchange were roughly 7.69 billion shares, higher than the daily average of 6.85 billion. On a day of record gains, it was certain that the advancers would run past the declining stocks; and for 85% stocks that gained on NYSE, only 13% of the stocks moved lower.

Friday’s session was dominated by positive developments from across the Atlantic, a rare event which helped benchmarks gain significantly. Investors were greeted by news that European leaders had struck a deal that aims to stabilize troubled banks, eventually easing the region’s lingering debt issues. In a major “breakthrough”, the European leaders allowed the permanent bailout fund, namely the European Financial Stability Fund and the European Stability Mechanism, to directly infuse money into the banks. This is a major step forward, as these funds would be utilized to directly purchase government bonds of Euro nations and that would not call for painful austerity measures. Greece, Portugal and Ireland had earlier faced the ordeal of adhering to strict economic norms in order to secure respective bailout funds.

Further, the deal will allow nations to recapitalize their banks without adding to their budget deficit. The leaders also agreed that a single supervising institution would be set up that would oversee the banks across the Euro-zone.

Incidentally, the terms of the agreement show that Euro-zone bellwether Germany had to give in to the demands, which the nation had so far resisted. Reports suggested that Italian Prime Minister Mario Monti played a key role in getting all the member nations to agree to the deal and save Italy and Spain in particular. Earlier Spain had to seek bailout worth $125 billion, and the eventual increase in debt burden had severely dented the markets. Thus, the deal had become a necessity and Monti reportedly urged leaders to stay back in Brussels until they agreed to these measures. An official said: "The south is now more assertive" and Mario Monti was well supported by Spain’s Prime Minister Mariano Rajoy. German Chancellor Angela Merkel, who had so far laid down conditions for the use of the permanent funds, ultimately had to give in to these demands. However, she did manage to get the others to agree to the condition that a common Euro-zone wide bank supervising institution should be set up.

The details of the deal remained sketchy. However, the major highlights were enough to boost investor sentiment, as historical trends had meant they were expecting little from the summit. Thus, the deal was all the more significant and led the benchmarks to close the otherwise dull second quarter with a bang. The S&P 500 and Nasdaq posted their best one-day performance this year on Friday. Nonetheless, quarter-long concerns about Euro-zone debt and dismal global economic readings kept the benchmarks back in the red for the entire period. The Dow, S&P 500 and Nasdaq lost 2.5%, 3.3% and 5.1%, respectively during the second quarter.

Friday’s gains might have failed to avert quarterly losses, but the benchmarks notched up the best performance for the month of June in over a decade. The Dow jumped 3.9% in June to record its best June performance since 1997, the S&P 500 recorded its best performance for this month since 1999, gaining 4.0%. Posting an increase of 3.8%, the Nasdaq enjoyed its best June since 2000. Benchmarks also ended the week on a winning note, with the Dow, S&P 500 and Nasdaq clinching gains of 1.9%, 2.0% and 1.5%, respectively.

The European deal was certain to lead the financial sector higher and the Financial Select Sector SPDR (XLF) ended 2.5% higher while KBW Bank Index (BKX) jumped 2.7%. Among financial stocks, Bank of America Corp (NYSE:BAC), American Express Company (NYSE:AXP), Citigroup Inc. (NYSE:C), Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), UBS AG (USA) (NYSE:UBS) and Wells Fargo & Company (NYSE:WFC) increased by 5.7%, 2.7%, 3.9%, 2.5%, 5.2%, 4.2% and 3.0%, respectively.

The European deal was the predominant factor and domestic economic readings hardly had any impact on the day’s trading session. The Reuters/Michigan Consumer Sentiment was reported to have dropped to 73.2 in June, down from 79.3 in May and was short of consensus expectations of 74.3. Separately, the Chicago Purchase Managers Index edged up to 52.9% in June, up from 52.7% in May and was also ahead of consensus estimates of 52.6%.