U.S. Indexes Drop 0.8% on Stalled Debt Talks and Wider Euro-zone Contagion

Bikram Pandey
18 Jul, 2011
New York City

The U.S. indexes followed the decline in European markets after debt stress rose across both sides of the Atlantic. Bank stress tests results showed significantly large bank exposures to bonds of Italy, Spain and Greece. Gold and silver resumed their advances in the third week.

[R]4:00 PM New York – The U.S. indexes followed the decline in European markets after debt stress rose across both sides of the Atlantic. Bank stress tests results showed significantly large bank exposures to bonds of Italy, Spain and Greece. Gold and silver resumed their advances in the third week.[/R]

The U.S. indexes traded lower as debt talks stall and lawmakers prepare to pass stop-gap bills that may lead to a partial solution ahead of the deadline set by the U.S. President this Friday.

In addition, the stress in the euro-zone sovereign debt rose as the yields on Spanish and Italian bonds inched towards a danger zone.

Negative market sentiment in New York was anchored before the opening with the European indexes trading lower as the details of bank stress test surprised many industry watchers.

What surprised the market was the extent of large exposure most banks have to the bonds of Spain, Italy and Greece. If Greece were to default tomorrow at least five banks’ capital would be wiped out and if Italian and Spanish bonds declined 25% at least 20 more banks capital would be reduce to zero.

The news dragged banks and insurance companies lower, yields on Italy and Spanish bonds inched up to a new record and gold traded above $1,600 and to a record high in at least nine currencies.

Market jitters were compounded after yields on bonds of Spain and Italy rose to 6.4% and 6.01% respectively. Most economists and traders estimate any yield over 7% will drive both countries in the arms of the EU regulators and will need multi-billion dollars of bailout.

Italy needs at least €350 billion and Spain needs at least €290 billion to roll over its debts in 2011 and if economic conditions do not improve these numbers could rise in 2012.

European markets declined more than 1% and the indexes in Italy dropped 3% and in Spain dropped as much as 2% before recovering to a loss of 1.5%.

In European corporate news, Philips swung to a second quarter loss on a one-time charge that never seems to go away and Atlas Copco dropped after it missed earnings.

News Corp dropped for the second week as restive investors demand an independent inquiry in the company’s conduct in handling the recent phone-hacking scandal at its UK publications that now has come to be viewed as systemic lapses.

Several investors are demanding a change of leadership at News Corp as investors get tired off acquisitions that never payoff like the purchase of MySpace for $580 million and Dow Jones & Company for $5.7 billion, legal settlement charges that have totaled to $600 million and rising political backlash in the U.S. and UK.

The News Corp is now trading at the 50%-Rupert-Murdoch-discount to its cash flow when measured to industry peers and the stock has declined more than 18% after last ten years of trading.

Australian stocks closed nearly unchanged as energy and metals closed mixed. Sundance Resources received $1.4 billion takeover from China based Hanlong Mining. News Corp continued its slide for the second week as restive shareholder demand the removal of Rupert Murdoch from management.

Commodities, Bonds and Currencies

The 10-year U.S. bond yield was flat 2.91% and 30-year U.S. bond traded up to 4.28%.

The U.S. dollar increased at $1.407 to one euro and fell against the Japanese yen to 79.07 yen.

Immediate delivery futures of Texas crude oil decreased $1.31 to $95.93 a barrel and futures of natural gas increased 0.06 cents to $4.55 per mbtu and gasoline price fell 3.02 cents to 309.91 cents a gallon.

In metals trading, copper decreased 0.6 cents to $4.41 per pound, gold added $13.40 to $1,603.50 per ounce and silver increased $1.09 to $40.17.