On Friday fears of Greece defaulting on its debt and a top German official’s resignation from the European Central Bank heightened concerns about the economic situation, which subsequently rattled the US markets. Concerns from Europe overshadowed President Barack Obama’s $447 billion stimulus program as investors remained skeptical about his administration’s ability to actually rescue the flagging economy.
The Dow Jones Industrial Average (DJIA) plunged 303 points or 2.7% to settle at 10,992.13. The Standard & Poor 500 (S&P 500) also sank 2.7% to close at 1,154.23. The Nasdaq Composite Index was down 2.4% and finished the day at 2,467.99. The fear-gauge CBOE Volatility Index (VIX) soared 12%, reflecting heightened fear among investors. The Street was kept busy with consolidated volumes on the New York Stock Exchange, Nasdaq and Amex at 8.7 billion shares, higher than the exchanges’ 20-day moving average. With sentiment turning completely negative, around 80% of shares traded on the NYSE finished in the red. The benchmarks also ended in the red zone for the week, with the Dow, S&P 500 and the Nasdaq down 2.2%, 1.7% and 0.5%, respectively.
With the Dow Jones suffering a heavy slide, none of its 30 components could manage to finish in the green. Leading the declines were Alcoa, Inc. (NYSE:AA), American Express Company (NYSE:AXP), Bank of America Corporation (NYSE:BAC), Caterpillar Inc. (NYSE:CAT), Hewlett-Packard Company (NYSE:HPQ), JPMorgan Chase & Co. (NYSE:JPM) and McDonald’s Corp. (NYSE:MCD) and they dipped 3.7%, 4.5%, 3.1%, 3.5%, 5.1%, 4.3% and 4.0%, respectively.
Concerns from across the Atlantic were at the root of the downtrend in US indices on Friday, with investors fearing that a Greek default was in the offing. Though the finance ministry of that country played down such fears and negated the possibility of a debt-default, jittery investors remained wary of Greece defaulting on its debt over the weekend. Thus, heightened fears led to the broad sell off in equities. The Greek finance ministry termed the rumors as “organized speculation” and assured that Greece remains dedicated to the “full implementation” of its bailout agreement.
Additionally, investor sentiment was further dampened by news of top German official and European Central Bank economist, Jurgen Stark, stepping down from the ECB, in protest against the bank’s bond-buying program. Experts are interpreting the resignation as a reflection of the increasing pressure that the top ECB officials are dealing with. Market onlookers also opined that the resignation brings into question the ECB’s ability of dealing with the continent’s lingering debt issues. Investors now seem less likely to be confident about euro leaders and their methods of rescuing the debt-stricken countries. However, the ECB said Jurgen Stark’s decision emanated from his own personal problems.
European concerns once again damaged the US indices and jittery investors who fear the beginning of another recession lacked confidence in the almost half-trillion stimulus program unveiled by President Barack Obama. Speaking before a joint session of Congress on Thursday, Barack Obama proposed the $447 billion stimulus plan that primarily focuses on boosting job creation. Obama urged lawmakers to act “right away” and help start the plan, which would boost infrastructure spending, slashing workers’ and small business owners’ payroll taxes and curtailing teacher layoffs. However, while investors seem to lack any conviction in the administrative tools that can actually implement such a stimulus plan, they also believe that Congress is less likely to approve the $447 billion plan. It is also being believed that the Republicans may support the idea of $253 billion in tax cuts, but they will oppose the tax holiday plan.
The only economic report, from the US Department of Commerce on wholesale inventories could hardly provide the markets with any direction. According to the Commerce Department: “Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $462.4 billion at the end of July, up 0.8 percent(+/-0.4%) from the revised June level and were up 15.1 percent(+/-1.1%) from a year ago”. The report also stated that sales of merchant wholesalers remained “virtually unchanged” in July, at $396.0 billion, from the month-earlier period.
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