Stocks and Bonds: Markets Stumble on Debt and Deficit Worries

Financial stocks led Wall Street lower on Monday and European stocks fell more than 1 percent.

In Europe, on the first day of trading after the publication of the stress tests late Friday, the euro weakened and the bond yields of indebted nations climbed as investors worried about the degree of political will to overcome the region’s debt crisis.

The euro weakened to $1.4109 from $1.415 late Friday. The market worries came at the start of an important week for the European Union as its leaders try to stem full-blown market contagion.

The leaders will hold a special summit meeting Thursday, but there appears to be no agreement yet over the terms of a second bailout for Greece, especially on the nature of a private sector contribution.

The lack of clarity along with recent investor sales of Italian and Spanish bonds have led analysts to become increasingly pessimistic.

“The euro zone crisis has recently worsened significantly, exacerbated by disagreements between the E.U.’s key politicians,” said Ruth Lea, an economic adviser to the Arbuthnot Banking Group in London. “It is becoming increasingly clear that there will have to be major steps towards fiscal union or the euro zone will begin to disintegrate.”

Investors also remained wary about events in the United States, where President Obama is trying to get lawmakers to agree to a deficit-reducing package before an Aug. 2 deadline for increasing the debt ceiling.

“People are very concerned about the length of the process in the debt-ceiling debate,” said Russell Price, a senior economist with Ameriprise Financial, adding that there were also concerns about contagion in the euro zone debt crisis.

On Wall Street, financial shares, which fell more than 1.3 percent, led the broader market down. The Dow Jones industrial average dropped 94.57 points, or 0.76 percent, to 12,385.16.

The Standard Poor’s 500-stock index lost 10.70 points, or 0.81 percent, to 1,305.44, and the Nasdaq composite index was down 24.69 points, or 0.89 percent, to 2,765.11.

Bond prices were also down. The Treasury’s 10-year note declined 6/32, to 101 21/32. The yield rose to 2.93 percent, from 2.91 percent late Friday.

In the United States, the News Corporation, which is in the midst of a deepening scandal, fell more than 4 percent, to $14.97. Banks fell, with Citigroup down 1.67 percent, to $37.74, and Bank of America down 2.8 percent, to $9.72. But some analysts said that Europe was the main driver of the down market. Some relatively positive corporate earnings, however, helped offset the negative sentiment in the United States.

“I think it is kind of a tug of war,” said James W. Paulsen, the chief investment strategist for Wells Capital Management. “You look at Europe, and then we are in the midst of a pretty good earnings seasons.”

But analysts also noted a flight to precious metals, including gold, as the reverberations from Europe and the debt talks were gauged against the bigger picture of an uneven economic recovery.

The price of gold for September delivery rose above $1,600 an ounce, as investors sought safer assets. And crude oil rose $1.35 a barrel, to $96.25.

Economists for Goldman Sachs reported after the market closed on Friday that they were cutting their outlook for real United States economic growth in the near term, to 1.5 percent in the second quarter from 2 percent, and to 2.5 percent in the third quarter from 3.25 percent.

In Europe,

further clouding the picture were the stress tests on the region’s banks carried out by regulators. Of the 90 banks tested, eight failed, with an aggregate capital shortfall of 2.5 billion euros. But the exercise left unanswered many questions about how many healthier lenders would survive a deepening of the debt crisis, given their exposure to Greek, Italian and Spanish bonds. A sovereign default case was excluded from the tests.

The Euro Stoxx 50, a benchmark index of blue-chip stocks in the region, closed down 1.98 percent on Monday, and the CAC 40 in Paris lost 2.04 percent.

Article source: http://feeds.nytimes.com/click.phdo?i=bbc643d90658246a6082c95317201657