Broadgate: Market News 26/2
26 February 2013
Stocks on Monday suffered their biggest drop since November after a strong showing in Italian elections by groups opposed to the country’s economic reforms triggered worry that Europe’s debt problems could once again destabilize the global economy.
The decline marks the biggest percentage drop for the benchmark Standard & Poor’s 500 Index since November7, and drove the S&P down to its lowest close since January 18. The CBOE Volatility Index or VIX, Wall Street’s favorite barometer of fear, surged 34 percent, its biggest jump since August 18, 2011.
Selling accelerated late in the trading session after the S&P 500 fell below the 1,500 level, which has acted as a significant support point. Monday marked the S&P’s first close under 1,500 since February 4.
Italy’s center-left coalition holds a slim lead over former Prime Minister Silvio Berlusconi’s center-right bloc in the election for the lower house of parliament, three TV projections indicated. But any government must also command a majority in the Senate, a race that is decided by region.
The resulting gridlock in parliament could lead to new elections and cast into doubt Italy’s ability to pay down its debt.
“Europe hasn’t gone away as an issue, it is going to hang around, and it is rearing its ugly head today,” said Stephen Massocca, managing director of Wedbush Morgan in San Francisco.
“If someone gets elected who is simply not going to play by the rules, what are they going to do? It puts them in a real quandary here because their financial support, their monetary support is all stipulated by the fact that these austerity programs are going to be in place.”
Earlier polls pointing to a center-left victory boosted stocks in Milan and other European markets, and also helped lift the S&P 500 to a session high of 1,525.84 on optimism that Italy would continue down its austerity path.
After a strong start to the year, equities have retreated more recently. The S&P 500’s slight fall last week was its first weekly drop after a seven-week string of gains.
In Monday’s volatile session, banks and other financial stocks were among the worst performers on worries about the sector’s exposure to Italy’s massive debt. The KBW Bank Index fell 2.7 percent.
The CBOE Volatility Index ended at 18.99, up 34.02 percent.
The Dow Jones industrial average dropped 216.40 points, or 1.55 percent, to 13,784.17 at the close. The Standard & Poor’s 500 Index lost 27.75 points, or 1.83 percent, to 1,487.85. The Nasdaq Composite Index fell 45.57 points, or 1.44 percent, to 3,116.25.
Although the overall market lost ground on Monday, there were a few bright spots.
Barnes & Noble Inc shares shot up 11.5 percent to $15.06 after the bookseller’s chairman offered to buy its declining retail business.
Amgen Inc shares climbed 3.1 percent to $89.55, after rival Affymax issued a voluntary recall of its only drug, an anemia treatment that competes with Amgen’s top-selling red blood cell booster, Epogen. Affymax shares lost 85.4 percent to $2.42.
The FTSEurofirst-300 index of top European shares edged up 0.04 percent and Italy’s main FTSE MIB ended up 0.7 percent after earlier gaining nearly 4 percent.
Political uncertainty on the home front, though, is also on Wall Street’s mind.
U.S. equities will face a test with the looming debate over so-called sequestration – U.S. government budget cuts that will take effect starting on Friday if lawmakers fail to reach an agreement over spending and taxes. The White House issued warnings about the harm the cuts are likely to inflict on the economy if enacted.
“Sitting out there is the one-thousand-pound gorilla – the sequester issue – and certainly nothing is happening there,” said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
Lowe’s Companies Inc lost 4.8 percent to $35.86 after the home improvement retailer posted fourth-quarter earnings.
With 83 percent of the S&P 500 companies having reported results so far, 69 percent beat profit expectations, compared with a 62 percent average since 1994 and 65 percent over the past four quarters, according to Thomson Reuters data.
Fourth-quarter earnings for S&P 500 companies are estimated to have risen 6 percent, according to the data, above a 1.9 percent forecast at the start of the earnings season.
Volume was active with about 7.27 billion shares traded on the New York Stock Exchange, NYSE MKT and Nasdaq, above the daily average of 6.46 billion.
Declining stocks outnumbered advancing ones on both the NYSE and the Nasdaq by a ratio of about 4 to 1.
The euro skidded close to a seven-week low against the dollar while the yen kept some distance from multi-month lows on Tuesday as the specter of political gridlock in Italy spurred traders to seek refuge in the U.S. and Japanese currencies.
Italy’s centre left won the lower house as widely expected, but projections by Italian media indicate no party or coalition will be able to form a majority in the upper house or Senate.
A deadlocked parliament could threaten Italy’s economic reforms and reignite fears about euro zone debt. That could reverse the optimism that the worst of the region’s crisis was over, which had benefited the euro and riskier assets in general earlier this year.
The euro traded at $1.3056 by midday, after falling as low as $1.3042, its lowest since January 10.
Support lies at $1.3032 from the bottom of the daily Ichimoku charts. A break there would send a strong bearish signal and is likely to open the way for a test of its January 4 low of $1.2998.
The common currency tumbled sharply particularly against the yen, having fallen 2.6 percent on Monday, its biggest daily loss since May 6, 2010, when investors were shocked by violent street protests in Greece sparked by austerity measures.
The euro fell to as low as 118.74 yen on Monday, down a whopping 6.5 yen from that day’s high of 125.36 yen. It last traded at 120.16 yen.
The dollar last traded at 92.03 yen, up about 0.2 percent from late U.S. levels in a volatile trade, on expectations of buying from Japanese importers.
The dollar index against a basket of other major currencies rose 0.2 percent.
In Monday’s whipsaw trading, the dollar tumbled as low as 90.85 yen, its lowest in nearly a month, from a 33-month high of 94.77 yen hit earlier in the day on the news that Japan plans to nominate an advocate of aggressive monetary easing, Asian Development Bank President Haruhiko Kuroda, as the next central bank governor.
Analysts say steep losses in the yen in recent months on bets of further monetary easing in Japan have made it vulnerable to sharp reversals.
Japanese Prime Minister Shinzo Abe’s repeated calls for more forceful central bank action was the main force behind the yen’s nearly constant decline since November.
“The yen was long overdue for a correction and all it needed was a catalyst. The yen’s downtrend may have run its course for the time being,” said Teppei Ino, currency strategist at the Bank of Tokyo-Mitsubishi UFJ.
While expectations of more BOJ easing could cap the yen, the Japanese currency could gain, at the expense of risk currencies, if risk appetite abates further.
In addition to the Italian gridlock, a U.S. stalemate over spending cuts that threaten the economic recovery undermined market sentiment. President Barack Obama and Congress remain deadlocked over how to prevent $85 billion in automatic government spending cuts set to start on March 1.
Investors’ immediate focus will be on U.S. Federal Reserve chief Ben Bernanke’s congressional testimony at 1500 GMT, with some rattled by debate within the Fed about how long it should keep buying bonds to support the economy.
Sterling held a bit above its 31-month low against the dollar hit on Monday, though it is seen as vulnerable on expectations the Bank of England could expand its quantitative easing further to bolster the fragile UK economy.
The pound bought $1.5205, holding above Monday’s low of $1.5073. Bank of England Governor Mervyn King will speak in Tokyo at 0600 GMT.
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