Even as corporate earnings indicated the economic recovery is beginning to take momentum, stocks slumped Wednesday on growing fears about the debt situation in Europe. Germany’s sudden announcement to ban naked short-selling also weighed on sentiments.
However, stocks managed to cut deeper losses, helped by the Federal Reserve’s forecast of an improving economy. Minutes from the last Fed meeting revealed policymakers were more upbeat about the U.S. economic recovery than they were at the beginning of the year. The policymakers found sufficient ground for increasing GDP expectations and slashing inflation and unemployment assumptions. The Fed noted that it sees the unemployment rate, now at 9.9%, falling to between 9.1% and 9.5% by the end of this year.
The Dow Jones industrial average dropped 66.58 points, or 0.6, to 10,444.37, adding to its 115 point drop on Tuesday. The S&P 500 index closed off 5.75 points, or 0.5%, to 1,115.05. The Nasdaq composite (COMP) slipped 19 points, or 0.8%. On the New York Stock Exchange, declining issues beat advancing shares by almost four to one on volume of 1.6 billion shares.
The yield on the benchmark 10-year Treasury note rose to 3.37% from 3.35% late Tuesday.
Yesterday, the euro pulled back from its 4-year low against the US dollar, partly due to speculation that a European intervention was likely, as well as on reports that the Swiss National Bank had moved to shore up the currency’s value. However, a large percentage of currency traders were not too optimistic and appeared convinced the euro will remain under long-term pressure.
Crude prices continued lower on demand concerns and as the greenback strengthened. Prices fell below $70 per barrel, at the lower end of many OPEC nations’ $70-$80 “fair value” range, and sharply below the $87.15 per barrel peak reached earlier in the month.
Financials, up 0.1%, were the only S&P 500 industry sector to close in the green, even as the Congress begins preliminary votes on financial reform legislation. A Senate bid to end the debate on the financial reform bill fell short of the required votes. Investors have discounted banks’ values based upon the perceived risk to profits from punitive regulatory measures designed to assuage a resentful voting public.
