Index Daily Change Weekly Change
S&P/TSX composite index 1.27% Drop 4.20% Drop
Dow Jones industrial average 1.33% Drop 5.70% Drop
Standard & Poor’s 500 Index 1.53% Drop 6.40% Drop
Nasdaq Composite Index 2.33% Drop 8.00% Drop
This blog might be a little long and maybe even a little boring…. It will start off a little bleak but will end with a surprise.
Canadian stock markets fell again on Friday as investors, fearing a growing Greek debt crisis and shaken by Thursday’s stock plunge, sold shares across all sectors and forced the S&P/TSX Composite index into negative territory for the year. With mystery still surrounding the reasons for Thursday’s 3.8% intraday drop, investors rushed to lighten equity holdings.
Thursday shook investor’s confidence and this was coupled with Greece and the whole European mess still unresolved as of Friday. There’s a lot of uncertainty and investors normally react to uncertainty by selling and taking money off the table. Resource stocks led the way as oil prices extended a week-long slide on concerns that Greece’s debt woes would infect other Euro zone countries and jeopardize the global economic recovery.
Mining stocks fell 1.9% despite a late rally in copper prices and strong gold prices, underscoring investor uneasiness with equities.
Euro zone contagion fears more than offset a report that showed a record number of Canadians found employment in April, data that was expected to put more pressure on the Bank of Canada to raise interest rates in June, ahead of other major industrialized countries. Despite losses, some analysts said the stock market has held up fairly well given recent weakness in resource prices and the European debt worries.
In the United States stocks turned negative for the year on Friday as fears of another credit crisis, stemming from Greece’s souring finances and lingering questions about what triggered the previous day’s dramatic plunge. The major stock indexes finished Friday’s volatile session from 1% to 2% lower.
The weekly declines for the Dow and the S&P 500 were the steepest since March 2009 when the market hit a 12-year low. The Nasdaq had its largest weekly drop since November 2008. Wall Street’s “fear gauge” the Chicago Board of Options Exchange (CBOE) volatility index or VIX jumped 25%, while the volume of shares traded was the 2nd highest this year. The volatility index ended at 40.95 after rising as high as 42.15 earlier in the day, its highest since April 2009. Over the past 2 weeks the Nasdaq has fallen more than 10%, the threshold which many traders define as a market correction. Stocks gained some ground after data showed U.S. non-farm payrolls grew at the fastest pace in 4 years in April as private sector employers ramped up hiring.
Governments around the world tried to calm markets after fears about Greece’s debt crisis spread further. The cost of protecting European bank debt against default reached levels not seen since the height of 2009’s economic crisis.
Thursday’s sell-off drove the Dow average down nearly 1,000 points, the biggest-ever intraday point drop. The fall may have been exacerbated by erroneous trades that showed some shares briefly fell to nearly zero in value. The Nasdaq and other exchanges said they would cancel erroneous trades. The U.S. Securities and Exchange Commission (SEC) held urgent discussions with other regulators to try to shed light on the causes of Thursday’s plunge. Trades that took place during the worst of Thursday’s drop will be canceled for more than 250 stocks, Nasdaq said, adding to a long list of “busted” transactions on NYSE and other exchanges and trading venues. The uncertainty around the cancellations could have heightened the day’s price swings as investors examined their holdings.
Euro zone leaders decided on Friday they have special measures ready before financial markets open on Monday to prevent financial turmoil in Greece spreading to other countries such as Spain and Portugal. The leaders of the 16 countries that use the single currency said that after talks with the European Central Bank (ECB) and the executive European Commission they were ready to take whatever steps were needed to protect the stability of the Euro area.
“We will defend the Euro whatever it takes. We have several instruments at our disposal and we will use them,” European Commission President Jose Manuel Barroso said after a Euro zone summit in Brussels. Financial markets have been beating Euro zone countries with high deficits or debts as well as low economic growth, threatening to force Portugal, Spain and Ireland into a position where, like Greece, they would need to seek financial aid.
Euro zone leaders, who have been accused of heightening market uncertainty with a lack of action, agreed in the face of rising market concern to accelerate budget cuts and ensure budget deficit targets are met this year. They agree to sharpen EU budget rules and have more effective sanctions for rule-breakers, and to pay close attention to debt levels and competitiveness. They agree they face an extraordinary situation after giving their political approval to an EU-IMF deal to release 110 billion Euros ($147 billion) to Greece over 3 years.
The Group of Seven (G7) finance ministers discussed the situation in a conference call after U.S. Federal Reserve officials expressed concern, and agreed to keep a close eye on the markets. U.S. President Barack Obama told German Chancellor Angela Merkel by telephone that he backed efforts to rescue Greece and said regulatory agencies were investigating an “unusual” sudden drop on U.S. markets on Thursday. “We agreed on the importance of a strong policy response by the affected countries and a strong financial response from the international community,” Obama said.
Philadelphia Federal Reserve Bank President Charles Plosser said the crisis did not pose a huge risk to the United States, but this did not mean it could not evolve into one. “The challenges that Greece poses are at the moment primarily for Europe more broadly that can spill over in the form of a weaker market for exports,” he said. “The more direct danger is of course concerns about the financial markets and how they will behave.”
On Sunday, European Union finance ministers moved toward agreement on an unprecedented loan package worth at least $645 billion to prevent Greece’s fiscal woes from triggering a broader sovereign-debt crisis and shattering confidence in the Euro. Forced into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, the 16 Euro governments sketched out plans to make 440 billion Euros ($570 billion) available, with 60 billion Euros more from the EU’s budget, according to 3 officials at the talks in Brussels. An additional, unspecified sum may come from the International Monetary Fund (IMF), the officials said.
“We are going to defend the Euro,” Spanish Economy Minister Elena Salgado told reporters as she arrived to chair the meeting yesterday. “We think we have a duty for more stability for our currency. We will do whatever is necessary.” Europe’s failure to contain Greece’s fiscal crisis triggered a 4.1% drop in the Euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings collapse. It prompted the U.S. and Asia to urge broader steps to prevent a debt crisis from pitching the world back into a recession.
“In the night, when the markets are opening, we cannot afford a disappointment,” said Finance Minister Anders Borg of Sweden, one of 11 EU nations not in the euro. “We now see herd behavior in the markets that are really pack behavior, wolfpack behavior.”
With the euro facing the stiffest test since its debut in 1999, the weekend turned into a crisis-management exercise to restore faith in the currency and prevent a European debt crisis from cascading around the world. The purpose is to “decide on a mechanism that enables us to assure the stability of the Euro, stability in the zone and, beyond that, stability in financial markets,” French Finance Minister Christine Lagarde said.
The Euro is down 15% since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8%. The political leadership of the $12 trillion economy also signed off this weekend on a 110 billion-Euro aid package for Greece negotiated by finance ministers last week. So far 9 governments have cleared the way for funds to be sent to Athens.
This morning, U.S. stock market futures soared and the S&P 500 could open 4% higher, after global leaders agreed to a $1 trillion emergency rescue package (in the game of poker they would call this ‘all in’, some would call it ‘shock and awe’ and others would suggest the long-term outlook is still bleak as it must still address the root cause of the issue) that caused the Euro and European stocks to surge this morning - - some by almost 10%. The package pledged 500 billion Euros ($670 billion) in loans and loan guarantees to Euro-zone countries, plus about 250 billion Euros from the International Monetary Fund (IMF). The package is on the same scale as the $700 billion bailout launched by the United States to stave off the credit crisis.
Also, the U.S. Federal Reserve reopened currency swap lines with several central banks in hopes of assuring markets of dollar liquidity, and the European Central Bank (ECB) said it would buy government debt to steady investor nerves (a complete reversal from Friday morning). A number of European central banks said they had already started.
The emergency action may allow investors to return their focus to the improving outlook for the global economy. About 70% of companies on the MSCI World Index that reported quarterly earnings since April 12th have beaten analysts’ forecasts, according to Bloomberg data. Employment in the U.S. increased in April by the most in 4 years (as mentioned) indicating the recovery is becoming self-sustaining (and governments can refocus on balancing budgets).
Today will be a good day for Europe and all equity markets – there will be a lift today.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
