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News of Spain’s borrowing costs reaching an ‘unsustainable level’ was among the global economic woes that dragged domestic markets to their third straight day of losses ahead of the unofficial kick off of the earnings season. Among other negative global factors, Japan witnessed a record pace of decline in machinery orders in May and China’s inflation rate was at a 29-month low.
The Dow Jones Industrial Average (DJI) dropped 0.3% to close at 12,736.29. The Standard & Poor 500 (S&P 500) was down 0.2% and finished yesterday’s trading session a couple of points lower at 1,352.46. The tech-laden Nasdaq Composite Index also slipped 0.2% and ended at 2,931.77. The fear-gauge CBOE Volatility Index (VIX) gained 5.2% to settle at 17.98. Volumes continued to be among the year’s lightest as consolidated volumes on the New York Stock Exchange, the Nasdaq and Amex were roughly 5.1 billion shares, sharply lower than the year-to-date daily average of 6.85 billion shares. Declining stocks moved ahead of advancing stocks; as for 54% stocks that declined, 43% stocks closed higher.
Few developments occurred on the domestic front, and the day was largely dominated by global factors. Unfortunately, almost all of them were negative. Just over a week ago, investors cheered the “breakthrough deal” by European leaders that allowed the permanent bailout fund to directly infuse money into the banks. It also agreed that a single supervising institution would be set up that would oversee the banks across the Euro-zone. However, the cheer seems to have faded now as both Spain and Italy have witnessed an uptrend in borrowing costs, once again reminding investors of the serious financial woes the nations are going through.
Yesterday, concerns were all the more intensified as Spain’s 10-year yields surpassed the 7% mark, which is considered to be at an ‘unsustainable level’. Ten-year yields had moved to a high of 7.108% before slipping somewhat to 7.06%. Investor fears following the surge were justified as historical trends have shown that nations with such high borrowing costs had to ultimately seek bailouts. Ireland, Greece and Portugal are those which have followed a similar trend. Meanwhile, Italy too witnessed inflated borrowing costs yesterday.
Developments in Asia also spread panic as machinery orders declines in Japan and China, the world’s second-largest economy, hinted at a gloomy state of economic affairs. Machinery orders slumped 14.8% in May in Japan, the biggest fall since April 2005. China’s consumer price index (CPI) registered a 2.2% increase, indicating the slowest pace of growth since February 2010. These dismal global reports sparked off fears that the gloomy European financial situation might have a wider impact. Also, the data hinted at slowing demand.
Talking about slowing demand, more particularly amidst the lingering financial crisis in Europe, investors may be apprehensive about the upcoming domestic earnings season. Strategists are not too hopeful about second quarter corporate results. For example, Jonathan Golub, chief strategist at UBS in New York was quoted by Reuters as saying: “We expect the tone of earnings season to be quite negative". Alcoa, Inc. (NYSE:AA) was slated to unofficially kick start the earnings season after the closing bell.
Also this week, two financial bellwethers JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Company (NYSE:WFC) are due to report their earnings results. The financial sector had a poor run yesterday and the Financial Select Sector SPDR (XLF) slipped 0.1%. Bank of America Corporation (NYSE:BAC), Citigroup, Inc. (NYSE:C), The Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) were among the decliners and they lost 1.3%, 1.0%, 1.1% and 1.5%, respectively.
On the economic front, the Board of Governors of the Federal Reserve System reported the fastest pace of growth in consumer credit in five months, which has increased by $17.1 billion. Consensus estimates had projected an increase by $8.7 billion. Also, the $8 billion jump in revolving credit was the highest since November 2007.
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