US equity markets opened lower today, as investors feared that the global economy would recover at a much slower pace than anticipated.

‘The reassessment of the global economic outlook is likely to continue this week,’ a team of strategists at Citigroup wrote today. ‘As a result, an extension of the recent bout of risk aversion may lie in store.’ [1]

Investors may have finally come to realise that their outlook on US economic growth may have been too optimistic, after American Vice President Joe Biden told ABC News on Sunday that the Obama administration ‘misread the economy’ when it forecast a peak of 8% in the unemployment rate – Thursday’s labour market report revealed that the US unemployment rate rose to 9.5% in June. Mr Biden went on to say that it was still too premature to discuss another stimulus package, however, as the affect of earlier stimuli still had to be felt.

But the news did not bode well for the market, which was already beginning to feel unconfident about the sustainability of American’s economic recovery following Thursday’s dismal non-farm payroll figure. There is also a considerable amount of scepticism over the upcoming second-quarter earnings season, which is due to kick off on Wednesday with Alcoa Inc.’s results.

The Institute for Supply Management’s index for US service industries, released a half hour after the opening bell, improved more than expected in June, helping counter some of the fears present in equity markets and lift US indices off earlier lows.

The ISM’s reading for the services industry came in at 47 in June, beating Bloomberg’s median estimate for a rise to 46 from 44 in May. However, the latest reading indicates that the US services industry is still contracting at a slower pace than the prior month. Readings above 50 are expansionary.

By around 3:30pm (London time), the Dow Jones Industrial Average was trading 65.53 points lower (-0.79%) at 8215.21, while the broader S&P 500 had declined 8.65 points (-0.96%) to 887.77.

Lingering investor pessimism also weighed heavily on commodities, with crude oil futures tumbling to a fresh five-week low today; August Brent crude oil fell 2.3% to $64.08 a barrel and August WTI dropped 3.8% to $64.18 a barrel. Base metals were also weaker, with copper declining 2% to $4,860 per tonne after Deutsche Bank warned that demand for the metal could fall by 3.9% in 2009 [2]. Aluminium, meanwhile, dropped 0.7% to $1,592 per tonne.

The falling price of commodities weighed on resource shares today, with energy producer Exxon Mobil down by 2% to $67.12 and Chevron 2.4% lower at $62.9 a share, respectively. Freeport-McMoRan Copper & Gold, meanwhile, was another casualty, tumbling 7.3% to $46.10 while Newmont Mining slid 3.3% to $38.91 a share.

US banks were also in the red this afternoon, with Citigroup plunging 4.5% to $2.75, and Bank of America down 3.8% to $12.16 .Wells Fargo, meanwhile, fell 2.9% to $22.42.

In corporate news, a US judge has given General Motors permission to sell some of its profitable assets so that it could exit bankruptcy protection.

PepsiCo, meanwhile, announced that it is planning to invest $1 billion in Russia over a span of three years, saying that it expects the country’s growth in retail sales to resume. ‘This investment reflects very clearly our great confidence in Russia and our long-term commitment to this very important market,’ said PepsiCo’s Chief Executive Officer Indra Nooyi in the statement. ‘We are optimistic about the future of Russia, and we look forward to continuing to build our business here’ [3]. Shares in PepsiCo rose 0.9% to $56.83 today.

Elsewhere, financial news provider Barrons writes on how Wal-Mart’s share price could potentially gain on its back-to-school sales and the start of the holiday season. It also indicates that e-fax provider J2 Global Communication may be vulnerable to a bout of selling pressure as it’s looking relatively expensive in comparison to its rivals.

Shares in Wal-Mart gained 0.33% to $47.95, while J2 Global Communication declined 4.2% to $20.37.

[1] Source: Bloomberg News (6 July 2009)
[2] Source: Financial Times (6 July 2009)
[3] Source: Bloomberg News (6 July 2009)

By Anthony Grech, Research Analyst, IG Index.

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