Lingering euro-zone debt worries and the impasse over debt-ceiling negotiations weighed down investor sentiment on Monday, while bank shares felt the burn of the markets’ downtrend.
The Dow Jones Industrial Average (DJIA) shed 0.8% to close at 12,385.16. The Standard & Poor 500 (S&P 500) slipped to 1,305.44, after dropping 0.8%. The Nasdaq Composite Index dropped 0.9% to settle at 2,765.11. The fear-gauge CBOE Volatility Index (VIX) recorded a surge of over 10% to trade slightly lower than 21. On the New York Stock Exchange, NYSE Amex and Nasdaq, consolidated volumes were 6.89 billion shares compared with the daily average of 7.49 billion. On the NYSE, for every five stocks that declined, only one stock moved up.
Among the 30 Dow components, only Chevron Corp. (NYSE:CVX) managed to finish in the green with modest gains of 0.04%. Among the leading decliners in the Dow were Alcoa, Inc. (NYSE:AA), Boeing Co. (NYSE:BA), Bank of America Corporation (NYSE:BAC) and Merck & Co. Inc. (NYSE:MRK) and they lost 2.0%, 2.4%, 2.8% and 1.2%, respectively. In addition, none of the 10 industry groups in the S&P 500 ended on a winning note, with financials and materials declining the most.
As for the financial sector, the Financial Select Sector SPDR (XLF) fund declined 1.4%. Bank stocks were a major laggard for the broader markets and decliners including The Goldman Sachs Group, Inc. (NYSE:GS), Deutsche Bank AG (NYSE:DB), UBS AG (NYSE:UBS), Credit Suisse Group (NYSE:CS), Barclays PLC (NYSE:BCS), Jefferies Group Inc. (NYSE:JEF) and Morgan Stanley (NYSE:MS) and they shed 0.6%, 3.3%, 3.2%, 4.3%, 7.1%, 2.5% and 1.9%, respectively.
The battering which banking stocks had to take was largely due to lingering euro-zone debt woes. On Friday last week, 90 European banks were subjected to stress tests by the European Banking Authority (EBA). Subsequently, the EBA announced only eight of the 90 banks had failed these tests. The stress tests were conducted to determine if the banks could survive during an extended recessionary period and 15 banks were expected to fail. However, the stress tests are being viewed as weak and inconclusive relative to the extent of the current crisis.
Failure to reach a settlement over lifting the US debt ceiling further dampened investor sentiment. Democrats and Republicans face an onerous task as they struggle to reach a consensus over raising the multi-trillion debt-ceiling. On Thursday, last week Moody’s Investors Services had put the US’ AAA rating under review for a possible downgrade, citing “the rising possibility” that Congress will fail to pass the debt ceiling by August 2. If Congress does not raise its $14.3 trillion debt ceiling by August 2, the Treasury Department may fail to pay at least 40% of its bills. Additionally, yesterday Fitch Ratings reiterated that it plans to downgrade the US sovereign debt rating to negative if the federal government fails to meet the August 2 deadline.
On the earnings front, Halliburton Company (NYSE:HAL) posted favorable results while International Business Machines Corp. (NYSE:IBM) joined the league of company’s reporting strong results after the closing bell. Halliburton’s quarterly profit surged 54% and the company’s shares edged up 0.1%. After the markets closed, IBM reported an 8% jump in its profit sequentially, and while the share traded 0.2% lower during the session, it jumped 1.7% after the closing bells. Almost half of the Dow components will be reporting their results this week while more than 100 S&P 500 companies are scheduled to report their quarterly results.
