Market Snapshot: U.S. Stocks Sell-Off on European Debt Crisis
The U.S. stock market plummeted more than 3% on heightened concerns over European sovereign debt contagion and its implications for global growth.
The Dow saw a 1,000 point drop in intraday session before recovering most of the losses and closing 347 points lower on the day. Although such a sharp decline, the biggest since 1987, was later attributed to a technical error, it amplified the underlying worries that have been reigning in the global markets. It appears that European sovereign debt contagion worries peaked today triggering a massive flight from risky assets to safe havens of the U.S. Treasurys, gold and the dollar.
In Europe, the ECB left the main refi rate unchanged and indicated that there were not talks about the program to buy government debt to provide markets with relief over the region’s debt crisis. This news caused another bout of equity selling pulling down major European bourses. From worst to best: the Italian FTSEMIB -4.27%; the Spanish IBEX 35 -2.93%; the French CAC 40 -2.20%; the London FTSE 100 -1.52% and the German DAX -0.84%.
Despite the fact that Greece’s parliament today approved austerity measures, worries remain about Greek long-term debt sustainability, especially if the country will not be able to return to capital markets after 2012. Investors also feared that Spain and Portugal could be next in line to require a bailout, especially after Moody’s placed Portugal’s government bonds on watch for possible downgrades of one or two notches over the next few months. Today Moody’s issued a report analyzing the potential for bank contagion from Greece in Portugal, Ireland, Spain, Italy and the UK. These developments triggered further sell-off in the EU common currency bringing the euro to a 14-month low against the USD.
The VIX index, which measures expected equity volatility, jumped 60% to over 40 before easing somewhat to 32, the highest since February 2007.
Despite the fact that EU member countries together with the IMF agreed to provide a €110bn ($146bn) rescue loan package to Greece in return for additional austerity measures, risks remain about the long-term government debt sustainability and whether budget cuts are socially feasible given yesterday’s violent protests. Last week rating agencies downgraded Greece due to its longer-term debt/deficit problems; Spain and Portugal were downgraded as well.
On the economic calendar, the U.S. Bureau of Labor Statistics reported that nonfarm business labor productivity grew at an annual rate of 3.6% q/q (6.3% y/y). Hours worked posted its second quarterly gain since Q2 2007, though the pace remained sluggish at 0.8% after a 0.7% gain in Q4 2009. However, output grew faster, rising by 3.1% q/q, causing productivity to continue rising. Real hourly compensation rose by 0.4% q/q in Q1 2010, following a 2.3% decline in Q4 2009. In 2009, productivity rose 3.7% from 2008, while unit labor costs fell 1.7%, a record pace of contraction.
The U.S. Department of Labor reported that initial unemployment claims fell by 7,000 to reach 444,000 in the week ending on May 1, 2010, after falling 8,000 in the previous week. The four-week moving average of initial claims fell by 4,750 to reach 458,500. In the week ending on April 24, continuous claims fell by 59,000 to reach 4.59 million, while the insured unemployment rate remained unchanged at 3.6%.
U.S. chain store sales grew 0.5% y/y in April 2010 after rising by a massive 9.1% y/y in March, according to estimates by Thomson Reuters. The slowdown reflects the shift of the Easter holiday into March this year, which caused chain store sales to post significant gains that month.
Into close, the S& P 500 index fell 37.22 points, or 3.24% to close at 1,128.15.
The Dow lost 347.80 points, or 3.20% to close at 10,520.32.
The tech-heavy Nasdaq composite index was down 82.65 points, or 3.44% to close at 2,319.64.
Treasurys continued to rise on risk aversion intensified by fears over the European debt crisis faltering global recovery. The yield on the benchmark 10-year Treasury note was down yielding 3.40% from 3.54% from late on Wednesday.
Crude for June delivery settled down $2.86, or 3.6% at $77.11 a barrel on the New York Mercantile Exchange. It’s been the sharpest 3-day plunge since December 2008 with oil prices dropping more than $9.
In currency markets today the euro dropped to a 14-month low against USD on European debt contagion risk.
In currency, EUR/USD traded at 1.2627, down from 1.2819 late on Wednesday in New York, Cable was quoted at 1.4828, down from 1.5102. USD/JPY traded at 90.26, down from 93.74. USD/CHF was at 1.1134, up from 1.1177, while USD/CAD was quoted at 1.0533, up from 1.0303.
For more in-depth analysis of RGE’s views of the market turmoil read: Market Turmoil Amid Eurozone Contagion Fears
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