European debt concerns once again weighed down the markets and dragged the Dow slightly lower, while the S&P 500 and Nasdaq posted meager gains. Reports of Germany’s economy contracting during the end of 2011 and a downward revision of economic growth estimates by the European Union (EU) dented the markets. However, a late upward swing helped the markets extend their stay around five-month high levels.
The Dow Jones Industrial Average (DJI) dropped 0.1% to settle at 12,449.45. The Standard & Poor 500 (S&P 500) edged up by a mere 0.03% to finish yesterday’s trading session at 1,292.48. The Nasdaq Composite Index added 0.3% to close at 2,710.76. The fear-gauge CBOE Volatility Index (VIX) rose 1.7% to settle at 21.05. On the New York Stock Exchange, NYSE Amex and Nasdaq, consolidated volumes were roughly 6.65 billion shares, marginally lower than the daily average of 6.7 billion. Advancers on the NYSE edged out the decliners, with 54% of the stocks registering gains versus 43% which traded lower. The remaining 3% of the stocks were left unchanged.
Looking at the margin by which the benchmarks moved yesterday, it might seem that there were not too many developments that could sway the markets. However, developments that came to light yesterday once again sparked recessionary fears to an extent. Debt crisis fears remained unabated in Europe, and apart from German and Italy’s leaders being upbeat about the situation there was nothing else to be happy about.
Germany, one of the important economies of the European Union, dampened sentiment after reporting that its economy had suffered a contraction at the end of last year. Germany’s Federal Statistics Office sparked fears of a possible recession as it said on Wednesday that the nation’s economy had possibly shrunk by 0.25% in 2011’s last quarter. Investors will have to wait until mid-February for the final numbers. However, the statistics office said that the nation had registered a strong 3% rate of growth for the full year.
Adding to these woes, the euro also slid against the greenback to hover around a 16-month low. Meanwhile, Fitch Ratings added to the gloom after predicting a dismal road ahead for the euro. David Riley, Fitch’ s head of sovereign ratings, said: "The ECB needs to be more actively engaged, but it can’t save the euro on its own. The crisis won’t be over until we have a broad-based economic recovery". He also urged the European Central Bank (ECB) to play a larger role in order to avert a "cataclysmic" euro collapse. Meanwhile, the ECB was expected to keep the interest rate intact at 1%.
Separately, the European Union reduced its third quarter economic growth forecast from 0.2% to 0.1%. With this downward revision, growth could hit its slowest pace since last two years. With concerns dominating the mood, investors will also remain nervous about how the bond auctions of Italy and Spain scheduled for this week, turn out. A poor showing would further dampen the already dismal outlook about Europe.
However, German Chancellor Angela Merkel and Italian Prime Minister Mario Monti both sounded upbeat about tackling lingering European debt woes. Angela Merkel particularly appreciated Italy’s approach towards dealing with economic threats. Speaking about the austerity measures adopted by the Italian government, Angela Merkel said: "We have followed with great respect how quickly the measures are being implemented…The work of the Italian government is being honored".
Meanwhile, on the domestic front, conditions looked better after the Federal Reserve’s Beige Book said that “national economic activity expanded at a modest to moderate pace during the reporting period of late November through the end of December”. The Beige Book reported an increase in consumer spending, expansion of the travel and tourism sector, higher demand for non-financial services, while the manufacturing activity expanded but at a slower pace.
Coming to individual sectors, materials enjoyed a second-consecutive day of gains and the Materials Select Sector SPDR (XLB) fund posted gains of 1.0%. Among the stocks, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), Southern Copper Corporation Com (NYSE:SCCO), Alcoa Inc. (NYSE:AA), Newmont Mining Corporation (NYSE:NEM), Nucor Corporation (NYSE:NUE) and U.S. Gold Corporation (NYSE:UXG) gained 3.2%, 1.3%, 2.0%, 1.1%, 1.3% and 2.4%, respectively. Notably, AK Steel Holding Corporation (NYSE:AKS) gained 8.6% after Credit Suisse upgraded the company to “outperform”.