On Wednesday, benchmarks closed in the red after European concerns once again dominated proceedings. Alongside Spain’s rising bond yields, Italy became the latest flashpoint after its borrowing costs also sprung sharply higher. Cyprus’ finance minister further intensified concerns after he spoke about the possibility of seeking a bailout for the nation. Domestic developments too were hardly encouraging, as retail sales data dropped for the second consecutive month.
The Dow Jones Industrial Average (DJI) dropped 0.6% to close at 12,496.38. The Standard & Poor 500 (S&P 500) was down to 1,314.88, after plunging 0.7%. The tech-laden Nasdaq Composite Index lost 0.9% and finished yesterday’s trading session at 2,818.61. The fear-gauge CBOE Volatility Index (VIX) gained 9.9% and settled at 24.27. It was a busy day on the Street as consolidated volumes on the New York Stock Exchange, Nasdaq and American Stock Exchange amounted to roughly 7.1 billion shares, higher than the 20-day moving average. Declining stocks outpaced the advancers on the NYSE; as for 66% stocks that dropped, 31% stocks moved up.
Benchmarks opened in the red but had strayed into the green for a brief period, before slumping further. Markets hardly had anything positive to cling on to as the lingering tension ahead of the Greek vote this weekend is constantly playing in the investors’ mind. The nation had failed to form a government following the elections in late April. Throughout May, there were apprehensions that Greece, which has no government to negotiate a bailout package, would eventually exit the euro.
Concerns are being further intensified now as the nation prepares to go to polls for the second time in less than two months. What most investors are worried about are rumors of an anti-bailout party securing a majority to form the government. In that event, the nation would have to exit the euro, which would have far reaching effects on global markets. These concerns were reflected in bank deposits shrinking by EUR500-EUR800 million daily in the last few days ahead of the vote. A banker, who wished to remain anonymous said: “This includes cash withdrawals, wire transfers and investments into money market funds, German Bonds, U.S. Treasuries and EIB bonds”. The nation had started withdrawing money from banks and was hoarding non-perishable food items instead.
Meanwhile, Cyprus also seems to be in need of a bailout and the nation’s finance minister has said this was needed to support banks ahead of Greece’s election. Cyprus is dependent on Greek results as the Cypriot banks’ Greek branches might fast lose its deposits if Greece exits the euro. Fears of Greece exiting euro also forced Moody’s to chop Cyprus’ rating by two notches to Ba3. Also, Egan-Jones Ratings Co and Moody’s Investors Service downgraded Spain’s ratings. Moody’s downgraded Spain from A3 to Baa3 and Egan-Jones, in its fourth downgrade in six weeks, reduced Spain’s rating to CCC+ from B-.
Europe had more negatives to share and Italy has now been added to the list of nations suffering from inflating borrowing costs. The 10-year bond yield had sprung to 6.1% from 6.02%. For the yields on 12-month bonds, the nation had to shell out an interest rate of 3.972%, up from last month’s 2.34%. Italy’s incremental bond yields came to light a day after Spain recorded its highest euro-era borrowing costs. On Tuesday, the 10-year Spanish bond yield touched a high of 6.83% before moving down marginally, thus recording its highest level since Spain entered the euro. Yesterday, Spain’s 10-year borrowing cost jumped further and settled at 6.71%. It is moving closer to the 7% rate, which is considered to be an ‘unsustainable level’. We have noticed in the recent past that European nations with a 7% borrowing rate ultimately had to seek bailouts.
With cross-Atlantic tensions taking a toll, investors also failed to find any respite from the domestic arena. The U.S. Department of Commerce noted “that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $404.6 billion, a decrease of 0.2 percent (?0.5%) from the previous month”. This was the first time in two years that retail sales dropped for two consecutive months. The drop was also wider than consensus estimates, which projected a 0.1% decline.
The retail sector took a hit following the report and the SPDR S&P Retail (XRT) dropped 2.8%. As for the retail stocks, Costco Wholesale Corporation (NASDAQ:COST), Wal-Mart Stores, Inc. (NYSE:WMT), PriceSmart, Inc. (NASDAQ:PSMT), Expedia Inc (NASDAQ:EXPE), Hibbett Sports, Inc. (NASDAQ:HIBB), Macy’s, Inc. (NYSE:M) and Dillard’s, Inc. (NYSE:DDS) lost 1.2%, 1.0%, 1.5%, 2.7%, 3.1%, 4.5% and 2.8%, respectively.
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