U.S. Stocks Fall on Earnings Jitters, Euro Worries

Bikram Pandey
09 Jul, 2012
New York City

Market indexes in New York traded lower ahead of earnings season and weak economic data from China, Japan and the euro zone. Merger deals of at least $7 billion were announced today and commodities staged a slight rebound. German yields turn negative.

[R]4:00 PM New York – Market indexes in New York traded lower ahead of earnings season and weak economic data from China, Japan and the euro zone. Merger deals of at least $7 billion were announced today and commodities staged a slight rebound. German yields turn negative.[/R]

U.S. indexes extend losses in the month as earnings calendar gain the focus and investors dial back expectations and more evidence emerged on the role of central bankers and regulators in how Libor rate was established during 2008 financial crisis.

The list of worries grew longer today after China reported consumer price index turned negative when compared to May. Manufacturers have been struggling with sales as export growth falls and domestic demand remains tepid.

Stocks wavered in New York and markets in Europe declined after Spanish bond yields rose above 7% and Italian yields jumped near the critical levels. Markets in Asia fell sharply after investors had first opportunity to react to the U.S. jobs reports released on Friday.

Indexes in Hong Kong plunged 1.9% and in Shanghai plunged more than 2.2% after the fears of deflation made rounds on trading desks.

On the merger front, at least three large deals were announced today. WellPoint agreed to acquire Amerigroup for $4.9 billion and Campbell Soup agreed to buy Bolthouse Farms for $1.55 billion. Thomson Reuters Corp said it plans to pay 40% premium to buy foreign exchange trading platform FX Alliance Inc for $625 million.

Boeings said on the first day on an air show that it won $7.2 billion worth Air Lease order based on the list prices. Most industry analysts placed the real value of the orders between $$3 billion and $3.5 billion.

The European indexes edged lower and Spanish yields jump above 7% as finance ministers gather in Brussels. German exports rose more than expected in May and French gross domestic product is estimated to fall by 0.1% in the second quarter.

London banking industry took another hit as Libor investigation widens to central bank officials. Paul Tucker, Deputy Governor of the Bank of England said in his testimony to a parliamentary committee today that he never encouraged banks to report artificially lower rates and was unaware that some banks had sought to fix the rate.

He added that the central bank and government at the time were not focused on Libor rates but instead wanted to make sure Barclays would not collapse and had the adequate funding at the height of the financial crisis in 2008.

For more than five years, the UK banking industry has been abuzz with rumors that several UK based banks were reporting rates that were lower than the market rates and the Bank of England and securities industry regulators have either ignored or failed to act to stem the practice. Their lack of action had in fact encouraged the practice of rate manipulation that in turn helped traders at banks for personal gains.

London has become an epicenter of financial scandals and large losses have been linked to reckless derivatives trading that traced back to London trading desks in 2008 that led to the fall of the largest insurance company AIG and contributed to the demise of Lehman Brothers and Bear Stearns.

Tucker said he was aware that interbank rate reporting system was flawed and “markets were not working” at the time of the crisis as most lending had dried up and “for months during the height of the crisis, the submissions were based on estimations.”

International investors are concerned that the UK regulators and the Bank of England have for a long time ignored the weak and selective reporting of Libor by banks that cannot be verified by independent authorities. Libor is used as a reference rate for trillions of dollars of international contracts.

Stocks in Japan declined after volatile machinery orders plunged more than expected and current account surplus shrank for the 15th month in a row. China reported a decline in June and confirmed the trend in place for three months.

Australian stocks closed lower for the third day in a row and the dollar traded near a record high against the euro. Leighton agreed to sell its waste management unit. Iluka Resources plunged after it issued a cautious outlook.

Commodities, Bonds and Currencies

The yield on 10-year bond decreased to 1.51% and on 30-year bond fell to 2.62%.

The U.S. dollar inched higher to $1.231 to a euro and increased against the Japanese yen to 79.63 yen.

Immediate delivery futures of Texas crude oil increased $1.50 to $85.97 a barrel and Brent crude advanced $2.11 to $100.30, futures of natural gas rose 0.105 cents to $2.88 per mbtu and gasoline price declined 4.9 cents to 271.55 cents a gallon.

In metals trading, copper added 2.7 cents to $3.43 per pound, gold increased $11.90 to $1,590.40 per ounce and silver added 52 cents to $27.44.