Possibilities that Spain would have to seek a sovereign bailout and a record jump in the nation’s borrowing costs dragged the US markets lower. The return of the European concerns resulted in the Dow’s second-consecutive triple digit loss; the first one since April 10. Separately, an earnings miss by McDonald's was an additional concern and the fast-food chain was the biggest laggard in the Dow. However, the benchmarks pared some losses at a later stage.
The Dow Jones Industrial Average (DJI) plunged 101.11 points or 0.8% to close at 12,721.46. The Standard & Poor 500 (S&P 500) dropped 0.9% to finish yesterday’s trading session at 1,350.52. The tech-laden Nasdaq Composite Index lost 1.2% and was down to 2,890.15. The fear-gauge CBOE Volatility Index (VIX) jumped 14.45 and settled at 18.62. Consolidated volumes on the New York Stock Exchange, Nasdaq and the American Stock Exchange were 6.13 billion shares, lower than last year's daily average of 7.84 billion. Declining stocks far outnumbered the advancers on the NYSE; as for 74% stocks that declined, 23% stocks moved higher.
Last Friday, markets had to reverse their three-day winning streak as European concerns returned to plague investor sentiment. On Friday, markets flagged following an announcement by Valencia, an autonomous region within Spain, that it was seeking financial aid. Now, another Spanish region Murcia has followed suit and will apply for bailout funds in September. Earlier this month, the central government allocated $22 billion worth of fund. Ramon Luis Valcarcel, the president of Murcia, commented: "To give you an idea, between 200 to 300 million euros would be asked for. But I don't know yet".
Amidst these concerns, Spain’s borrowing costs sprung to a euro-era high. Economic fears led Spain’s 10-year bond yields to 7.565%, the highest ever since the euro was formed in 1999. Bond yield of 7% is often considered to be an “unsustainable level”. Greece, Ireland and Portugal have had to seek bailouts when their bond yields have crossed this figure. Thus, with Spain’s bond yields crossing 7%, investor fears intensified that the nation would have to seek a sovereign bailout.
These European concerns dampened domestic sentiment and the benchmarks had to settle sharply lower. Banking stocks are among the most vulnerable ones to these concerns and the KBW Bank Index (BKX) slumped 0.9%. Among the decliners, Citigroup Inc. (NYSE:C), Morgan Stanley (NYSE:MS), UBS AG (USA) (NYSE:UBS), Deutsche Bank AG (USA) (NYSE:DB), Royal Bank of Scotland Group plc (ADR) (NYSE:RBS), Credit Suisse Group AG (ADR) (NYSE:CS) and Wells Fargo & Company (NYSE:WFC) plunged 2.1%, 1.1%, 2.0%, 4.3%, 3.6%, 1.9% and 1.1%, respectively.
Separately, earnings results were of little help to the markets on Monday. Rather, an earnings miss by McDonald's Corporation (NYSE:MCD) and the eventual 2.9% drop in its shares made it the biggest laggard among the Dow components. Lower comparable-store sales across all regions coupled with unfavorable currency have impacted McDonald's quarterly figures. Quarterly earnings not only missed estimates, but were also down year on year. However, Hasbro, Inc. (NASADQ:HAS) and Halliburton Company (NYSE:HAL) reported encouraging quarterly results. Shares of these companies jumped 4.0% and 2.4%, respectively.