Broadgate: Market News 20/3
20 March 2013
The S&P 500 fell for a third day on Tuesday but pared losses late in the day after the parliament of Cyprus rejected a proposed tax on bank deposits.
The proposed tax on savings in banks had been a condition of a European bailout. When the Cypriot parliament rejected the tax, the decision eased worries that savers will begin withdrawing funds. At the same time, it left efforts to rescue the country – the latest casualty of the euro-zone debt crisis – up in the air.
“Regardless of the vote in Cyprus, we still have the problem. No one knows: ‘What is the Cypriot financial restructuring going to look like?'” sad Nicholas Colas, chief market strategist at the ConvergEx Group, in New York.
Banks in Cyprus will remain closed until Thursday.
The S&P 500’s retreat followed a long streak of gains where the index came close to hitting its all-time closing high set in 2007. The S&P 500 is still on track to post its best quarter in a year. The benchmark S&P 500 is up 8.4 percent for the year, while the Dow is up 10.3 percent.
Energy shares led the day’s decline following a drop in oil prices and a slide in the shares of oil services companies. The PHLX oil services sector index dropped 2 percent. Shares of Schlumberger Ltd fell 3.1 percent to $73.98. The stock of Halliburton dropped 2.7 percent to $39.62.
The Dow Jones industrial average edged up 3.76 points, or 0.03 percent, to close at 14,455.82.
The Standard & Poor’s 500 Index fell 3.76 points, or 0.24 percent, to finish at 1,548.34. The Nasdaq Composite Index slipped 8.50 points, or 0.26 percent, to close at 3,229.10.
After the bell, shares of Adobe Systems Inc, the maker of Photoshop and Acrobat software, rose 5.6 percent to $43.05 after its results beat analysts’ estimates. The stock ended the regular session at $40.75, down 0.8 percent.
In Tuesday’s volatile trading, the Dow made a swing of 132.25 points from its session high to its intraday low. The Nasdaq made a swing of 47.18 points from its intraday high to its session low.
The CBOE Volatility Index or VIX, Wall Street’s favorite barometer of fear, rose 7.71 percent to end at 14.39. Earlier, the VIX hit an intraday high of 15.40 – up 15.27 percent from Monday’s close.
During the session, the S&P 500 traded as low as 1,538.57. The S&P’s swing from its intraday high to that session low covered 18.68 points.
Strategists expect the S&P 500 to still break above its record high reached in October 2007, but they expect the rally to slow from there. A Reuters poll of equity strategists surveyed over the past week put the S&P 500 at 1,600 by year end, above its October 9, 2007, all-time closing high of 1,565.15. The Dow initially surpassed its 2007 record levels on March 5 and then set nominal record closing highs on subsequent session through the close on March 14.
On Monday, Goldman Sachs increased its year-end target for the S&P 500 to 1,625 while Morgan Stanley raised its target to 1,600.
The day’s declining shares included Electronic Arts Inc, which fell 8.3 percent to $17.15 a day after the video games publisher’s chief executive resigned after six years at the helm, saying he held himself accountable for missed targets.
Shares of Cliffs Natural Resources Inc fell 6.6 percent to $20.33 after Goldman Sachs cut its price target for the iron ore producer’s stock, citing a bleak outlook for the steelmaking material.
Among the day’s gainers, Walgreen Co and partner Alliance Boots ABN.UL said they signed a 10-year deal with AmerisourceBergen and will take a stake in the distribution company, ending Walgreen’s current contract with Cardinal Health Inc (CAH.N).
Walgreen shares hit $45.80, their highest since September 2007, and closed at $44.74, up 5.4 percent. Amerisource gained 3.6 percent to $50.06. In contrast, Cardinal lost 8.2 percent to $42.35.
European bank shares extended Monday’s decline, with the sector’s index down 2.1 percent on Tuesday.
“Whether the deposit levy occurs or not, the fact that it was agreed to by the EU means that claims on private property are not out of bounds, which pretty much says that nothing is out of bounds,” said Fred Copper, senior portfolio manager, international equity, at Boston-based Columbia Management, in reference to the banking crisis in Cyprus.
U.S. economic data added to upbeat views on the housing sector. Housing starts data showed that groundbreaking to build new U.S. homes climbed in February and new permits for construction rose to their highest since 2008, in a sign the U.S. housing market’s recovery was building momentum.
The PHLX housing sector index rose 0.3 percent to end at 191.79, after earlier climbing to 194.41 – its highest level since late July 2007.
Volume was roughly 6.8 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.
Decliners outpaced advancers on the NYSE by about 17 to 13, while on the Nasdaq, seven stocks fell for every five that rose.
The euro hovered near a four-month low on Wednesday after Cyprus rejected terms of a proposed bailout, creating uncertainty about the country’s financial future and reviving fears about the stability of the euro zone.
Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout on Tuesday, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray.
The general assumption in markets, however, is that the European Union, as so often before, will thrash out a deal that keeps Cyprus in the single currency.
“European officials have repeatedly come out with last minute plans to save the day, and I think down at these levels, that’s a major reason why the market isn’t chasing it aggressively,” said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore, referring to the euro’s moves against the dollar.
“But the longer that Europe doesn’t come up with a plan B, the greater the risk of a major slide in the euro,” he added.
The euro held steady at around $1.2877, near its 200-day moving average. On Tuesday, it dropped below that support and touched a four-month low of $1.28435 on trading platform EBS.
Further losses were prevented only after the European Central Bank said it was committed to providing liquidity to Cypriot banks within certain limits.
EU countries had warned they would withhold 10 billion euros ($13 billion) in bailout loans unless depositors in Cyprus, including small savers, shared the cost of the rescue.
The unprecedented plan to impose taxes on citizens’ savings in Cyprus, announced over the weekend, has stirred worries that savers in other, larger European countries might be spurred to withdraw their bank deposits. There is also concern that it could serve as a precedent for any future bailouts in the euro zone.
Depositors in euro zone countries outside the Cyprus are unlikely to immediately start withdrawing their deposits, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
However, the chances of that happening may now be higher, in the event of any acute increase in worries about a euro zone country’s fiscal woes or the health of its financial sector, Okagawa said.
“If things stay quiet that will be okay, but I think there are now question marks about possible shock absorbers in the case of any turmoil,” he said.
The yen edged higher in thin market conditions, with Japanese financial markets closed for a national holiday.
The euro slipped 0.2 percent to 122.39 yen. The dollar fell 0.1 percent to 95.04 yen.
The market is wary of any comments from Haruhiko Kuroda, who becomes governor of the Bank of Japan on Wednesday.
Expectations are high that Kuroda will quickly embark on a much more aggressive monetary policy to fight deflation, perhaps even before the BOJ’s next scheduled policy meeting in early April.
Sterling held steady at $1.5084 ahead of the release of the UK annual budget later on Wednesday.
Investors are also watching whether UK finance minister George Osborne announces a change in the Bank of England’s (BoE) remit to allow more leeway on inflation targeting, paving the way for further monetary easing.
The focus is also turning to the end of a two-day U.S. Federal Reserve policy meeting on Wednesday. The Fed looks set to keep buying $85 billion a month in mortgage and Treasury bonds in an effort to encourage investment and bolster a weak economic recovery.
As ever, the market will be hyper sensitive to any hint on when the Fed might consider slowing its asset buying plans.
The Fed is due to provide an update to its economic forecasts on Wednesday, and Fed Chairman Ben Bernanke is due to hold a news conference.
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