On the opening day of the week, markets slipped to their lowest level in almost a month, as euro-zone debt worries dampened investor sentiment. Additionally, an impasse over budget talks dragged the mood lower while investors looked for direction from the earnings season, which was unofficially kicked-off by Alcoa,
The Dow Jones Industrial Average (DJIA) plunged 1.2% to settle at 12,505.76. The Standard & Poor 500 (S&P 500) dropped 1.8% to close at 1,319.49. The Nasdaq Composite Index slipped 2.0% to finish at 2,802.62. The fear-gauge CBOE Volatility Index (VIX) surged 18% to settle at 18.8. On the New York Stock Exchange, AMEX and Nasdaq, consolidated volumes remained low at 6.55 billion shares, compared with last year’s daily average of 8.47 billion. On the NYSE, for every six stocks that declined, only one managed to climb up.
None of the 30 Dow components managed to finish in positive territory. Dow components like Boeing Co. (NYSE:BA), Bank of America Corporation (NYSE:BAC), Hewlett-Packard Company (NYSE:HPQ) and JPMorgan Chase & Co. (NYSE:JPM) led the decline as they sank 2.3%, 3.3%, 3.1% and 3.2%, respectively. In the S&P 500, all bellwether sectors traded lower with five sectors dropping over 2%. The index has lost gains during the month, but the Dow and the Nasdaq managed to end in the positive zone.
The third-largest nation of the European continent joined the list of European nations gripped by debt fears. After Ireland, which dented the US markets late last year, and very recently Greece and Portugal bolstering the jitteriness, Italy joined the list and jolted the markets yesterday. Fears over euro-zone debt spreading from these nations to the larger economies, in particular to Lo Stivale, dragged sentiments lower. Meanwhile answering to rumors that he might resign, Giulio Tremonti, the finance minister of Italy said: “Beware,” and added: “If I fall, then Italy falls. If Italy falls, then so falls the euro. It is a chain”. Rumors surfaced that the finance minister might have to make an exit after the cabinet and Prime Minister Silvio Berlusconi opposed Tremonti’s call for significant spending cuts.
On the domestic front, President Barack Obama’s meeting over the weekend with the Republicans failed to provide any clear solution about the U.S. budget deficit. The Democrats and the Republicans differed in their views; while the former pressed for a “balanced” move, the latter voiced concerns that a tax hike would deter the economy. However, Obama confirmed that he would get back to the Congress over the issue until the debate sees a solution.
These concerns dragged the markets, which were already reeling under the disappointment job reports released by the government last Friday. On Friday, the Labor Department reported that non-farm payroll employment had increased by only 18,000, against consensus expectations of an increase of 96, 000.
Meanwhile, investors looked to the earnings season for direction, which was unofficially kicked-off after Alcoa, Inc. (NYSE:AA) reported its second quarter results after the closing bell. The largest aluminum manufacturer posted better-than-expected sales, and shares limited their losses in after hours trading as it shed 0.6% after markets closed, versus its 2.9% decline in intra-day trading. For markets to draw enough positive momentum from the earnings season, the corporate results need to reflect a significant jump in earnings. But analysts predicted a 13% average increase in earnings of the domestic companies, which is the lowest increase recorded in two years.
Financial bellwethers like JPMorgan Chase, Citigroup, Inc. (NYSE:C) and other financial companies like Capital One Financial Corp. (NYSE:COF) and Progressive Corp. (NYSE:PGR) are slated to report their results this week. However, the financial sector suffered a heavy fall on Monday as Financial Select Sector SPDR (XLF) fund declined 2.7%. The financial sector has been one of the worst performers this year and it will require robust results to turnaround its fortunes.
Zacks Investment Research
