Investor expectations were dashed after the ECB’s President Mario Draghi failed to live up to his commitment last week to do “whatever it takes” to keep the Euro-zone intact. Mr. Draghi said the central bank would purchase Spanish and Italian bonds, though subject to governments activating the European bailout funds in the bond market. Eventually, the benchmarks slipped for the fourth-consecutive day.
The Dow Jones Industrial Average (DJI) lost 0.7% to end over 92 points lower at 12,878.88. The Standard & Poor 500 (S&P 500) declined 0.8% and finished yesterday’s trading session at 1,365.00. The tech-laden Nasdaq Composite Index dropped 0.4% and ended at 2,909.77. While the markets ended lower, the fear-gauge CBOE Volatility Index (VIX) reflected easing fears in the market, losing 7.3% to settle at 17.57. It was a busy session as consolidated volumes on the New York Stock Exchange, NYSE MKT and the Nasdaq were roughly 7.1 billion shares, higher than the year-to-date daily average of 6.75 billion. Decliners outpaced the advancers on the NYSE; as for 60% stocks that declined, 36% stocks moved up.
Markets were down for the fourth-straight day and the disappointment from the other side of the Atlantic dented markets yesterday. In summary, Mr. Draghi fell far short of his words. After the ECB meet he announced that the central bank is ready to purchase Italian and Spanish bonds. However, this needs the activation of the European bailout funds. Draghi said: “As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist - with strict and effective conditionality in line with the established guidelines”.
Mr. Draghi has not shut the door altogether, but hinted that the banks might make their move after September. He said: “The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective”. He also said that the ECB has decided to keep the benchmark interest rates at 0.75 percent.
Nonetheless, these were not exactly comments that investors were hoping for. Market strategists noted that investors, riding high on hopes following Mr. Draghi’s pledge last week, were eyeing stronger and more concrete action from the central bank. Meanwhile, according to a Bloomberg report Mr. Draghi had said Germany’s Bundesbank had reservations about the bond purchase. As for the broader economy he commented: “Economic growth in the euro area remains weak”.
Thus, things were far from bright on the other side of the pool and its effects were felt in the US domestic markets as well. The financial sector took a beating with the Financial Select Sector SPDR (ETF) (XLF) dropping 0.8%. Among financial stocks, Bank of America Corp (NYSE:BAC), Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), PNC Financial Services (NYSE:PNC), U.S. Bancorp (NYSE:USB), Wells Fargo & Company (NYSE:WFC) slumped 0.6%, 2.3%, 2.3%, 1.0%, 1.3% and 1.7%, respectively.
Meanwhile, initial claims showed an increasing trend while factory orders declined. As per the data released by the U.S. Department of Labor, the advance figure for seasonally adjusted initial claims for the week ending July 28 were 365,000, up 8,000 from previous week's revised figure of 357,000. Initial claims data failed to match expectations as consensus estimates were 371, 000. Separately, the U.S. Census Bureau reported that new orders for manufactured goods declined 0.5% in June to $465.8 billion. This was contrary to expectations of a 0.5% rise and the earlier month’s increase of 0.5%.