Unfavorable European political developments dragged US benchmarks significantly lower on the opening day of the week. While the Dutch government looked set to vacate office, French President Nicolas Sarkozy came second in the first round of France’s presidential elections. Additionally, reports showed that debt in the region is mounting, despite strict budgetary measures. Separately, reports of retailer Wal-Mart blocking a bribery investigation against executives in Mexico dragged the company’s shares down and also dampened the overall sentiment.
The Dow Jones Industrial Average (DJI) lost 0.8% to settle at 12,927.17. The Standard & Poor 500 (S&P 500) was down to 1,366.94, after losing 0.8%. The tech-laden Nasdaq Composite Index inched down a percent to finish Monday’s trading session at 2,970.45. The fear-gauge CBOE Volatility Index (VIX) jumped 8.8% to settle at 18.97, reflecting heightened concerns in the market. Consolidated volumes on the New York Stock Exchange, Nasdaq and American Stock Exchange were 6.56 billion shares, somewhat lower than this year’s daily average of 6.77 billion shares. Decliners outshined the advancers; as for every three stocks that declined on the NYSE, only one stock managed to move up.
European concerns were sparked off after French President Nicolas Sarkozy failed to secure the majority of votes in the first round of presidential elections. Incumbent Sarkozy has been a key Euro-zone figure, attending, discussing and deciding in coordination with other political heads on ways to rescue the Europe from its lingering debt woes and save the shared currency from collapsing. He has been an elemental figure in dealing with strict austerity norms, and his ouster leaves the fate of economic developments uncertain. Such fears were clearly reflected in the markets’ downtrend. Meantime, his opponent Francois Hollande said that while France had chosen to “close one page and open another”; he is well aware of the economic situation. “My final duty and I know I’m being watched from beyond our borders, is to put Europe back on the path of growth and employment” he added.
Meanwhile, discussions over austerity measures broke down in Netherlands. Consequently, Prime Minister Mark Rutte and his cabinet offered to resign, sparking of speculations that elections would be held “as soon as possible”. Subsequently, what weighed on investors the most was the ambiguity over Holland retaining its ‘AAA’ credit rating. Standard & Poor’s had warned the nation earlier that its cherished rating was under threat if its economy faltered.
To add to these woes, Monday witnessed dismal economic data coming in from the region. Data firm Markit reported that the preliminary purchasing managers’ index (PMI) showed business activity in the 17-nation euro zone had contracted faster-than-expected in April. The manufacturing index was at a 34-month low when it dropped to 46.0 from 47.7 in March. This was contrary to economists’ expectation of the index climbing up to 48.1. Services PMI dropped from 49.2 in March to 47.9 in April, and was at its five-month low. Also at a five-month low was the composite PMI, which slumped to 47.4 from 49.1 in March. Separately, the European Union’s statistics office reported that the region’s overall debt had climbed to its highest level the since euro came into existence. The debt level jumped to 87.2%.
With such far-spread economic concerns, the financial sector could hardly have escaped a battering and the Financial Select Sector SPDR (XLF) dropped 0.7%. Financial bellwethers bore the brunt with Bank of America Corporation (NYSE:BAC), Citigroup, Inc. (NYSE:C), Morgan Stanley (NYSE:MS) and Wells Fargo & Company (NYSE:WFC) falling by 2.2%, 1.9%, 2.9% and 0.9%, respectively.
Also on the domestic front, media reports regarding Wal-Mart Stores Inc. (NYSE:WMT) blocking an investigation of bribery charges against executives in Mexico was a big drag. According to The New York Times, Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico, ‘had orchestrated a campaign of bribery to win market dominance”. However, Wal-Mart ‘hushed up’ the incident. The report noted: “Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark”.
Shares of Wal-Mart slumped 4.7% following the report which also affected the broader sentiment. Other retailers such as J. C. Penney Company, Inc. (NYSE:JCP), Target Corp. (NYSE:TGT), Kohl’s Corp. (NYSE:KSS) and Costco Wholesale Corporation (NASDAQ:COST) dropped 2.2%, 1.1%, 1.0% and 1.1%, respectively.
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