Stocks fall for second day on weak Spain bond auction

Tuesday’s stock price drop traveled around the globe on Wednesday, taking Asia and (especially) Europe lower and carrying over into a second day in New York . The losses were generally steeper today than in Tuesday’s profit taking, as NASDAQ dropped 1.5%, its worst one-day decline of the year, while the S&P 500 lost 1% and the Dow fell 0.9%. Stocks were down from the opening bell, with declines aggravated by the reaction to a poor bond auction by the Spanish government. Investors may be experiencing a sense of déjà vu all over again, except with a Spanish flavor instead of a Greek one. U.S. bonds caught a flight-to-safety bid, which helped the 30-year Treasury bond gain over a point in price on the day, lowering its yield to 3.36%, down from Tuesday’s 3.44% close.

European stocks got clobbered by yesterday’s Fed news and today’s poor Spanish bond auction. The German DAX index plunged 2.8% while the CAC 40 index of French stocks fell 2.7%. The Stoxx Europe 600 was off by 2.1%. After the note sale, Prime Minister Mariano Rajoy said the country’s economic situation is one of “extreme difficulty,” raising the specter of more bailouts on Europe’s docket. (Rajoy appears to be more inclined toward austerity than to bailouts, in contrast to Greece’s path.) Spain sold 2.6 billion euros ($3.4 billion) of notes Wednesday, just above the minimum amount it wanted to sell and well below its 3.5 billion-euro maximum target. The average yield on the four-year notes jumped to 4.32% from 3.38% from last month’s auction; in the secondary market, yields on four-year notes were up roughly 25 basis points today (although still lower by 200 basis points than their November peak of more than 6%.

Meanwhile, European Central Bank President Mario Draghi said the euro zone’s economic outlook remains subject to “downside risks.” Draghi added that “the remaining tensions in euro area sovereign-debt markets are expected to dampen economic momentum.” The euro slumped 0.7% against the dollar today. As if the Spanish debt woes weren’t enough, several disappointing economic reports were released today, including a much lower than expected German factory orders report and weaker than expected indicators of euro-area retail sales and manufacturing output.

Adding to the day’s negative tone was a steep drop in oil prices. Nymex crude futures fell close to 2% to around $102 a barrel. The Energy Department announced another large increase in U.S. crude oil inventories, up 9 million barrels for the latest week, the biggest increase since 2008, on top of a 7 million barrel increase the previous week.  U.S. crude output is now at its highest level since December 1999. Commodity metals prices were also down sharply, with gold losing 3% and silver futures plunging 6%. Even gasoline futures declined – by nearly 2% – for the day.

ADP’s payroll report for March came in about as expected, with employers adding 209,000 positions following an upwardly revised 230,000 gain in February. The ISM survey results for non-manufacturing industries in March generally came in short of expectations, although the employment component rose to its second highest level in six years. Along with earlier evidence of expanding employment in manufacturing, Wednesday’s ISM employment fillip suggests that Friday’s important nonfarm jobs report will meet or exceed market expectations.

Reports/dates/facts/links worth paying attention to over the next week:

  1. April 5: Jobless claims; chain store sales for March.
  2. April 6: Stock markets closed for Good Friday, U.S. bond market open for an abbreviated session and banks open; unemployment report for March; consumer credit for February.

Copyright © 2012 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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