Posted on | July 23, 2012 | 13 Comments
After opening down more than 200 points today, the Dow Jones Industrial Average has now stabilized at around 12,700 — about 130 points down — as of 1 p.m. Eastern. The Dow has lost more than 500 points since its May peak of 13,279, and the ongoing European debt crisis is to blame:
Fresh crises in Spain and Greece weighed heavily on markets this morning, sending stocks sharply lower and raising borrowing costs across Europe to levels seen as unsustainable.
In Spain, Catalonia was the latest of up to six regions in the country that say they may need aid from the central government, prompting speculation that Spain would need a full bailout.
The Eurozone crisis is, to some extent, a good-new/bad-news scenario for U.S. stocks. The bad news is that the instability and uncertainty undermine investor confidence, and portends the chance of another international bank crisis. The good news is that Europe’s problems make U.S. stocks a sort of safe haven as investors flee endangered European markets.
Overall, the situation in Greece and Spain is a net negative for Wall Street, but it does create a limited amount of upside opportunity.
UPDATE: The Associated Press:
Fear that Spain may need a government bailout sent its borrowing costs soaring, the euro to a two-year low against the dollar and stocks around the world sharply lower as investors pulled back Monday from all manner of risk. . . .
Borrowing costs rose sharply for Spain and Italy after news the Spanish economy contracted by a quarterly rate of 0.4 percent in the second quarter. Falling economic output makes it more difficult for Spain to deal with its debts. . . .
Bank stocks, which tend to take a hit when fear flares in Europe, were among the biggest losers. Citigroup stock dropped more than 2 percent and Bank of America 1.3 percent.
There were also signs that a global economic slowdown is hitting U.S. companies that rode out the recession fairly well, largely because currencies overseas have tumbled against the dollar.
Gold prices were actually down about $5 to $1,577 an ounce as of 1 p.m. Eastern, but if worries about the Eurozone continue to escalate, it would be reasonable to expect gold to go up.
UPDATE II: More explanation on Spain’s problems:
Financial pressure is mounting on Spain as its economy shrinks and the cost of bailing out banks and regional governments grows. Investors pushed the country’s borrowing rates to alarming heights Monday amid concern the government could be overwhelmed by debt and forced to seek an international bailout.
The interest rate, or yield, on Spain’s 10-year bond spiked 0.22 percentage points to 7.45 percent. That is the highest level since the euro began in 1999 and is considered unsustainable for more than a few months. . . .
If those borrowing rates do not fall back, the central government may end up being locked out of international markets and be forced to seek a financial rescue, like Greece, Ireland and Portugal.
“The higher the yield goes, the more untenable the situation becomes,” said Rebecca O’Keeffe, head of investment at Interactive Investment.
Spain is the fourth-largest economy in the eurozone, bigger than Greece, Ireland and Portugal combined.
The moral of the story is simple: In the long run, you can’t fool the market.
UPDATE III: Also, in the long run, you can’t fool voters:
A new poll from The Hill shows that two-thirds of likely voters blame bad economic policy for the current state of the economy — and more blame Obama than anyone else . . .
Well, duh. Bad economic policy causes a bad economy. Americans can look at the situation in Europe and figure out who it is that has been implementing European-style economic policies in this country. Are we headed into another recession? As Ed Morrissey points out, for many Americans the last recession never ended.