A stream of negative news struck equity markets today, sending the Dow and S&P 500 sharply lower at the open.
The trading day kicked off with Eurostat revising Greece's budget deficit for 2009 to 13.6%, worse than previously anticipated, adding that the country's deficit could even top 14% of GDP in 2009 as a result of off-market swaps. This exceeded the government's official estimate of 12.9% by almost a full percentage point, and suggests that Athens has no other choice but to tap the EU/IMF funds as soon as possible or else risk defaulting on its debt obligations. The biggest concern at this juncture is the timing of funds; it stands to reason that a delay in receiving the funds from the EU and IMF would only exacerbate the situation, not only for Greece but for peripheral European countries as well.
Today's news sent the yields on Greece's 10-year bonds soaring to a 12-year high of 8.57%, meaning the market now demands a higher interest rate to lend money to Greece in order to compensate for the higher risk of default. Portugal's bonds were also under pressure today, while spreads on the German Bunds reached their highest level since the formation of the EU, at 184 basis points. Bond yields in Ireland, Portugal, Spain and Italy also advanced today, making it more expensive for the governments of these indebted countries to service their own debt.
News about President Barack Obama's preparations to propose a sweeping overhaul of the US financial system also weighed on risk appetite. According to Reuters News Obama will try to introduce the 'Volcker Rule', which would enhance transparency and ban banks from engaging in proprietary trading, among other effects. The International Monetary Fund (IMF) yesterday proposed two new taxes for financial institutions – one is said to include a 'financial stability contribution' which could levy a flat-rate charge on balance sheets and the other a 'financial activities tax' on profits and remuneration. Obama may very well decide to introduce similar measures, which could materially lower the banking sector's future earnings expectations.
Concerns about a potential eurozone crisis and renewed uncertainty over the US financial regulatory system has unequivocally had an impact on banks this afternoon. Until the market learns more about the situation sentiment across the banking sector is likely to remain bearish, and as such it came as no surprise that Citigroup shares fell 1.3% to $4.86 while Bank of America retreated 0.5% to $18.18. Wells Fargo sank 0.5% to $32.84 while Goldman Sachs and JPMorgan dropped 0.7% to $157.86 and 1.6% to $44.62 respectively.
US mining shares were also heading south, as risk aversion helped the US dollar advance broadly, rendering commodities priced in dollars relatively less attractive. The dollar also remained steady against the yen this afternoon, after Fitch Ratings warned that Japan's creditworthiness was at risk of a downgrade as a result of rising government debt. 'In the absence of sustained economic recovery and fiscal consolidation, government debt will continue to rise, placing downwards pressure on sovereign credit and ratings over the medium term,' Fitch said in a statement today. The biggest concern at the moment is that Japan hasn't announced any solid proposals on how it intends to improve its financial situation. Until those details emerge then we could very well see the yen underperform.
Technology shares were also under pressure today following disappointing quarterly results from Nokia and Qualcomm. Shares of wireless chipmaker Qualcomm plunged 6.2% to $39.98 after the company unveiled fiscal third-quarter forecasts which were below consensus expectations, while the American depositary shares of Nokia tumbled 13.8% to $12.88 after profits missed analyst estimates due to weaker-than-expected revenue growth.
eBay was also in the red, down 7.65% to $24.28 after projecting second-quarter earnings and revenue that missed consensus estimates. The online auctioneer also said that customers were switching to competitors, implying it was losing market share. E-commerce company Amazon fared better, however, its share price rising 0.8% to $147.65. The company is scheduled to report its results after the closing bell today.
Qwest Communication International was also in demand this afternoon, up 4% to $5.45 after CenturyTel agreed to buy the company for $10.6 billion in stock – a deal that combines the two biggest US landline-phone companies. CenturyTel's shares fell 2.8% to $35.20.
The data on the economic front did very little to help revive confidence today. The US Labour Department reported that the number of Americans claiming first-time jobless benefits (initial jobless claims) fell by 24,000 to 456,000 in the week ending 17 April, short of expectations for a drop to 450,000. However, the previous week's level was revised downward to 480,000 from 484,000, while the total number of Americans claiming jobless benefits for more than a week (continuing jobless claims) decreased by 40,000 to 4.65 million. In addition, the unemployment rate among people eligible for benefits, which tends to track the unemployment rate, fell to 3.6% from 3.7% in the week ending 10 April.
Elsewhere, US wholesale inflation rose more than anticipated last month due to a sharper rise in food prices, but the core measure that strips out volatile food and energy items hardly increased. The US producer price index for finished goods climbed by a seasonally adjusted 0.7% in March, exceeding expectations of a 0.4% increase, while the core producer price index, which excludes volatile food and energy prices, edged 0.1% higher in line with expectations.
Encouragingly, existing home sales rose by more than anticipated in March, up 6.8% following a 0.6% decline in February.
By around 4pm (London time) the Dow Jones Industrial Average was 66.88 points (-0.60%) below its previous close at 11058.04, while the broader S&P 500 was 8.5 points (-0.70%) lower at 1198.67.
