It appears as though the rally we have witnessed since March is on the brink of faltering.
There was potential for a stock market rebound today following a speech by Federal Reserve Chairman Ben Bernanke, who yesterday evening indirectly informed the market that US interest rates will remain low for a prolonged period.
But just as sentiment started to improve, a concoction of negative data and information struck the market, sending US and European stock markets tumbling between 1% and 2% this afternoon.
Risk appetite continued to receive a battering today, after Moody’s Investors Service said the deterioration of public finances in the United States and United Kingdom may ‘test the triple-A boundaries’.
They are, in other words, saying the countries risk losing their sovereign credit-ratings if policies remain as they are.
Exacerbating sentiment was Fitch Ratings decision to downgrade Greece’s credit rating from A- to BBB+ with a negative outlook, and renewed fears over Dubai World’s debt restructuring.
We were also hit with a barrage of disappointing economic data in the UK as well as Europe.
The British Retail Consortium today revealed that like-for-like sales grew by only 1.8% on the year in November, trailing Bloomberg’s expectations for a 4% annual increase.
Then a separate report from the Office for National Statistics revealed that UK industrial and manufacturing output for October remained flat on the month.
An unexpected drop in German industrial production also struck confidence. The Federal Ministry of Economics and Technology today said that industrial production in Europe’s biggest economy declined 1.8% in October, trailing Bloomberg median estimates for a 1% gain.
By around 3.35pm (London time) the Dow Jones Industrial Average was trading 90.69 points (-0.9%) lower at 10299.42, while the broader S&P 500 was knocked 8.97 points (-0.8%) below its previous close at 1094.28. In the meantime, the FTSE 100 retreated 81.22 points (-1.5%) to 5229.44.
Elsewhere, the VIX, a measure of market volatility that is colloquially referred to as ‘the fear index’, surged 5.3% to 23.27 and the US Dollar made broad gains, as investors decreased their exposure to higher yielding assets and parked funds into Treasuries.
The US Dollar rebound exerted pressure on commodity prices, with December gold and January Light Sweet crude oil both falling 1.3% to $1148.1 per ounce and $73 a barrel, respectively.
The drop in commodity prices had an inevitable impact on resource shares as well. Barrick Gold Corp, the world’s biggest producer of the precious metal, plunged 3.3% to $41.03, while Freeport-McMoRan Copper & Gold sank 2.5% to $76.7.
US corporate news didn’t help sentiment either unfortunately, with diversified manufacturing firm 3M seen 1.5% lower at $76.72, after proving a full year outlook that fell short of consensus expectations. The company was also cautious over its 2010 earnings outlook.
Shares of McDonald’s were also knocked back, after disappointing sales figures for November left the market feeling that the fast food company is not immune to slowdowns in consumer spending. McDonald’s traded 1.7% lower at $60.86.
By Anthony Grech, Research Analyst, IG Index.
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