Equities Tumble Ahead Of Earnings Season; Europe Drops After IMF Forecast

[Chart courtesy of MarketWatch.com]

Equities plunged today with the S&P 500 and NASDAQ extending losses for the third straight day as investors chose to remain on the sidelines while third quarter earnings season started unofficially.

The Dow Jones Industrial Average (DJIA) slipped 110 points, finishing lower for the second day in a row. The 30-stock blue chip index turned overtly negative with decliners outpacing gainers 27 to 3 while the S&P 500 Index (SPX) fell 14 points with the energy sector emerging the sole winner among its 10 major business sectors after oil prices rallied on heightened tensions in the Middle East.

There was no place to hide as bond yields increased (BND, TLH, TIP) the most in three weeks despite the International Monetary Fund cutting global growth forecast late Monday by 0.2 percent to 3.3 percent. The agency also trimmed growth projections for 2013 to 3.6 percent from its earlier July forecast of 3.9 percent.

Sentiment weakened further after ECB President Mario Draghi said there’s no alternative to spending cuts even as Spain dithers over seeking assistance formally while addressing the European Parliament.

The common-currency zone faced heightened risks from financial instability, he noted, reiterating the central bank’s readiness to buy sovereign bonds if required. Meanwhile, German chancellor Angela Merkel met Greek Prime Minister Antonis Samaras to discuss a two-year extension to meet tough austerity targets before the next round of bailout funds are released.

The dollar gained traction against most of its peers Tuesday after the International Monetary Fund sounded alarm on a global slowdown late Monday. The ICE dollar index, a gauge of the greenback’s strength against a basket of six currencies, rose to 79.973 from late Monday’s 79.595.

Across the Atlantic, the Stoxx Europe 600 index sank 0.5 percent, extending losses for the pan-European index into the second day.

Risk appetite diminished after the IMF’s latest report said several key eurozone members, including France and Spain will miss deficit reduction targets even as the economies continue to shrink. The Spanish IBEX 35 index tanked 1.9 percent while 10-year Spanish bond yields jumped 11 basis points to 5.78 percent.

Warning the US on the so-called “fiscal cliff,” the IMF said US growth in 2013 could stall if politicians failed to find a way to solve the issue, as it otherwise could cause large spillovers for commodity exporters and Washington’s major trading partners.

In Germany, the DAX 30 index fell 0.8 percent with index component Deutsche Bank giving up 1.1 percent.

The CAC 40 index lost 0.7 percent in Paris while UK’s FTSE 100 closed 0.5 percent lower with banking major HSBC Holding Plc sinking 0.8 percent.

Miners, however, bucked the trend after People’s Bank of China injected $42.1 billion into the economy through reverse repurchase agreements to ease up the tight liquidity conditions. Resource firms Rio Tinto Plc and BHP Billiton Plc added 1.5 percent and 0.7 percent, respectively.

In the ETF space, energy-linked funds sizzled even as equity markets got hammered over concerns the US earnings season will disappoint. Oil futures jumped 0.5 percent after China announced fresh easing measures, leading many to believe demand for the world’s biggest energy consumer may increase.

The United States Oil Fund (USO) was one of the biggest gainers for the day, vaulting 2.89 percent for the day. The United States Natural Gas Fund (UNG) also jumped, rising 2.15 percent over Monday’s close.

Our Trend Tracking Indexes (TTIs) ended the day as follows:

Domestic TTI: +2.55%

International TTI: +2.60%

Disclosure: Holdings in BND, TLH, TIP

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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