Wall Street opened sharply lower, as Europe’s deficit headache continues to hit confidence, and uncertainty surrounding the impact of Obama’s financial reform bill weighs on financial stocks.
It wasn’t a pretty day for the equity markets with Europe’s fiscal deficit problems once again taking their toll on Wall Street. The European Union and International Monetary Fund rescue package, which was approved over the weekend, has done little to instil confidence surrounding debt-stricken Greece, with investors sceptical that the €110 billion package will be enough to support the crippled nation. Protests and strikes in Greece are undermining the country’s ability to meet its ambitious austerity measures, and are adding further doubts over whether the country will be able to hit its target of reducing fiscal debt to 3% of GDP by 2014.
Speculation that Spain and Portugal will be next to request rescue funds from the IMF are further fuelling woes for the area, and has resulted in the euro falling to its lowest level in a year against the US dollar.
By 4pm (London time) the Dow Jones Industrial Average was trading 1.94% lower at 10939.92, while the S&P 500 retreated 2.09% to 1177.65. The tech-heavy NASDAQ 100 slid 3.02% to 1971.99.
Leading the fall were resource shares, which retreated on data showing a slowdown in China’s manufacturing activity and another increase in the required reserve ratio for banks. In addition, a 40% super tax being imposed on Australian miners also damaged the sector, since it could suggest that other countries may follow suit. Aluminium producer Alcoa dropped as a result, shedding 4.18% to $12.60.
Oil majors also slipped, after crude oil prices fell overnight, Chevron lost 2.61% to $80.67 while Exxon Mobil was 1.27% lower at $66.98. In contrast, BP, which is still struggling to contain its oil spill in the Gulf of Mexico, managed to buck the negative trend and rise 0.72% to $50.55 on the New York Stock Exchange following the prior day’s sell off.
The financial sector will be waiting anxiously to see what effect Obama’s financial reform bill will have, with voting on amendments to the bill commencing today. It is expected wide support will be achieved for the ‘Volcker’ rule, which plans to ban proprietary trading from deposit-taking financial institutions. The proposed reform to move over-the-counter derivatives trading into a central clearinghouse is also expected to gain approval. While the proposal for a $50 billion bailout fund has been blocked by Republicans, in its place may be a 0.15% tax on banks with balance sheets over $50 billion, which could cost the sector up to $117 billion. The uncertainty has weighed on the larger market cap banking stocks, with Bank of America, Wells Fargo and JP Morgan all marginally lower at the open.
Pharmaceutical shares managed to outperform Wall Street today with Pfizer and Merck & Co. up 1.6% to $17.18 and 2.07% to $36 respectively, after a smaller-than-expected fall in profits. Pfizer reported that its first quarter net income fell 26% to $2.03 billion. Earnings came in at 60 cents a share, better than the 53 cents a share expected by analysts surveyed by Bloomberg. It was a similar story for Merck & Co. which reported a 79% drop in first-quarter profit, with net income of $298.8 million. Excluding one-off items, earnings per share was 83 cents, ahead of estimates of 75 cents according to Bloomberg.
