The Dow closed down 103 points or 1.0% to 9908. The S&P fell 0.9% to 1056 and the Nasdaq lost 0.7%.
At a G7 meeting over the weekend, finance ministers offered a united front on Greece and stated their confidence in Greece's ability to cut its deficit and sooth global fears. In typical "G" fashion however, no specific assurances were made regarding direct intervention.
Wall Street continues to hold lingering doubts about the "PIGS" (Portugal, Italy, Greece, Spain). While the concept of these sovereign nations all defaulting on their debt seems unlikely to most, the lingering memory of subprime becoming Bear Stearns becoming Lehman Bros, before anyone fully realised the gravity of the situation, continues to instill nervousness.
After heavy selling last week there was some respite on Friday as relatively good news on the US jobs front helped stem the tide and bring in both short-coverers and bargain-hunters. The Dow average has previously spent some intra-day time below the psychological 10,000 mark, but to date has recovered. Not so last night. Despite spending mid-session attempting to stay above the flat-line, the stock markets drifted lower in the afternoon. When it seemed the Dow would not recover this time, a late selling wave hit. There were no economic releases last night.
After the initial PIGS scare, in which stocks and commodities were sold indiscriminately, attention has now turned to valuation. The European issue has exposed the fact that in late 2009 and early 2010 the emperor had no clothes. Index funds drove stock markets higher at year-end to enhance returns and the buying continued into the new year as new money sought similar gains. But sometime late in 2009, valuations began to exceed realistic earnings forecasts, and PEs returned to "normal" levels as if the GFC was some long forgotten blip. Commodity funds bought candidly in support of a general belief the US dollar was on a long term slide.
The first rule of markets is that if everybody agrees something will happen, most likely the opposite will happen. Greece was the trigger that woke the emperor out of his daze and exposed his nakedness to himself. Very quickly "risk" trades were reversed. Previously high-performing cyclical stocks were dumped, along with commodities, emerging markets, and any debt that wasn't backed by the US Treasury.
As the European situation plays out - and this could be a lengthy waiting game - brokers are advising switching out of cyclicals and into defensives. Taking profits on big movers and parking back into small movers. Last night on Wall Street the sellers won but not all stocks were sold. Big-name financials were switched into smaller financials, for example. Industrials were slammed in favour of healthcare. Funds are re-aligning once more, having come to the realisation they were too quick to assume simply that happy days were here again.
In the midst of all of this, the US fourth quarter reporting season is being largely overlooked. Net results have been pretty positive to date, but Wall Street is obviously concerned that one swallow does not a summer make. There is a long row yet to hoe, and assumptions of a rapid return to strong earnings in subsequent quarters are now being re-addressed.
Outside of stock markets, movements elsewhere were minimal last night. The US dollar index fell initially but recovered toward the close to 80.31 - little changed. Gold barely moved at US$1063.60/oz. The Aussie slipped slightly to US$0.8663.
Oil closed before the late selling with a US70c rise to US$71.89/bbl. On Friday night in London, the big base metal sell-off preceded the bulk of Wall Street's recovery. Thus last night there was some stabilisation, with most metals rebounding 1-2% and zinc adding back 3%. But once again, London closed before Wall Street sold off at the death.
The SPI Overnight lost 31 points or 0.7%.
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