By Kristina Peterson
The U.S. stock market ended Friday with a hefty loss fueled by
renewed worries about Europe's finances but still managed to end a
turbulent week higher, helped by early enthusiasm over a large
European bailout package.
The Dow Jones Industrial Average (DJI), which traded with a loss
of more than 200 points through much of the afternoon, ended down
162.79 points, or 1.5%, at 10620.16, hurt by declines in all 30
components. The Nasdaq Composite (RIXF) slid 2%, and the S&P
500 (SPX) was off 1.9%, hurt by selling in every sector.
The Russell 2000 index of small-capitalization stocks,
considered riskier because of their higher volatility and lower
cash reserves, plunged 2.2%.
The euro sank to its lowest level since October 2008, trading
recently below $1.24, after new economic data showed core inflation
in Spain turned negative in April. Deflation would make it harder
for Spain to grow out of its debt woes.
Some analysts questioned whether austerity measures announced
this week in Spain and Portugal could lead to civil strife, and
Deutsche Bank Chief Executive Josef Ackermann told German
television Thursday evening that there are some doubts about
Greece's ability to repay debt.
Friday's plunge marked a sour ending to a week that began with
hope as the European Union approved a nearly $1 trillion bailout
for its most heavily indebted members. But as the week went along,
traders focused more on the details of implementing those measures
and the likelihood that, even in a best case, the EU's financial
weaklings will face years of struggle to get on surer footing.
"The selling today really started with the euro and just spilled
into the Dow and the other stock indexes, which is interesting to
see," said currency analyst Joe Trevisani, of the brokerage FX
Solutions. "You don't often get such a coherent message across all
the markets. It shows you there are some real doubts out there
about whether the euro-zone can pull off this balancing act."
The CBOE Market Volatility Index (VIX), known as the market's
"fear gauge," jumped 22%. With two hours of trading to go, 3.9
billion shares had changed hands in New York Stock Exchange
composite trading.
Early euphoria over that bailout package, which came in concert
with the Federal Reserve and other central banks saying they would
reestablish a foreign-exchange swaps program, helped push the Dow
Jones Industrial Average up 405 points on Monday.
For the week, the Dow rose 2.3%, the S&P 500 (SPX) gained
2.2% and the Nasdaq Composite (RIXF) added 3.6%.
Strong dollar sinks commodities
On Friday, basic materials and energy stocks slid as a stronger
dollar cut into buying power.
Crude-oil prices slid $2.79 to a three-month low of $71.61 a
barrel, and other raw materials weakened as prospects of the
international economic recovery dimmed in the wake of austerity
measures adopted in several European countries.
United States Steel (X) slid 5.7%, while AK Steel (AKS) fell
3.7%. Titanium Metals Corp. (TIE) shed 3.3%. Chemical companies,
which tend to have more European exposure, sank. Dow Chemical Co.
(DOW) slid 5.9% and Eastman Chemical Co. (EMN) fell 2.2%.
Financials also weakened as investors flocked toward more
defensive stocks. J.P. Morgan Chase (JPM) slid 2.3%, while
Citigroup (C) fell 2.7%.
"The concerns are really more risk first, currency-adjusted
earnings second," said Bill Vaughn, equity portfolio manager at
Evercore Wealth Management, noting that consumer staples showed
less of a decline on Friday, despite significant European exposure,
likely because they are viewed as safer, steadier investments.
For U.S. investors, especially those with memories of the Asian
currency crisis of the late 1990s, the concern is that debt crises
like Greece's will spread to other euro-zone members, weakening
growth in a major market and hurting American financial companies
with ties to European banks.
"You have to worry about the counterparty risk and clearly our
banks are closely tied with other global large banks," said Jerome
Heppelmann, portfolio manager at Old Mutual Focused Fund.
Almost a week after the European Union outlined a nearly $1
trillion rescue package for Greece, some U.S. investors say they
have lost confidence in the will of European nations to enact
proposed austerity measures.
"The European Central Bank's view of sanitizing the debt is
maybe not quite the same as how the Fed acted in this country,"
with its quantitative easing program, Vaughn said. "There's concern
that it still might not fully address the problem they have."
The dollar strengthened against the euro, but slipped against
the yen. The U.S. Dollar Index (DXY), which tracks the dollar
against a basket of six other currencies, surged 1% and investors
swarmed to Treasurys.
The 10-year note rose 22/32, pushing yield down to 3.457%.
Meanwhile, gold futures edged higher.
Banks hit by debit card measure
Financial stocks sank after the Senate voted to allow the
Federal Reserve to regulate fees on debit card transactions. The
measure will also allow retailers more leverage in negotiating with
credit-card firms and banks over the fees for card transactions.
Visa (V) tumbled 9.9%, while MasterCard (MA) fell 8.6% and Bank of
America (BAC) fell 3.1%.
The Senate also approved a measure that would establish a
federal credit-rating board that would act as a middleman between
issuers seeking ratings and the rating agencies. Moody's declined
0.6%.
In economic news, the Commerce Department said retail sales rose
0.4% in April, better than expected. However, some of that demand
may have been driven by the government's home buyer tax credit,
which expired at the end of last month. Building-material and
garden-supply-store sales posted the largest gain of any category
in April.
Offsetting the data, several retailers reporting earnings on
Friday disappointed investors. Nordstrom (JWN) slid 3.7% after its
profit missed analyst estimates, while J.C. Penney (JCP) shed 2.2%
after its first-quarter earnings rose but its second-quarter and
full-year outlook disappointed analysts.