Tuesday’s late rally fails to lift stocks out of the red

A late rally on Tuesday proved to be too little, too late to lift U.S. stocks for a third straight day.

Stocks reached their lows of the session about 2:30 EST when they turned upward, but their earlier losses proved too much to overcome. The Dow Jones Industrial Average, down 0.3% at that point, managed to advance slightly into positive territory about 15 minutes before the close before falling back and ending with a 0.1% loss. The S&P 500 managed to halve a 0.4% loss to close down 0.2%, while NASDAQ, down 0.7%, trimmed its loss at the close to 0.3%. Across the board, losers outpaced gainers by about a 60-40 ratio, while seven of the S&P’s 10 sectors were lower, led once again by energy stocks, which fell 0.7%. Oil prices remained weak, with WTI futures falling 0.8% to remain below $98 a barrel. The International Energy Agency cut its global demand forecast for this year and next after demand in the second quarter fell to its lowest level in two years.

Bond prices were also weaker. The price of the 10-year Treasury note fell about 5/32 to raise its yield two basis points to 2.44%. The government sold $27 billion of three-year notes at the lowest yield since last April. While the bid-to-cover ratio, at 3.03 times, was the weakest since the June 2013 auction, the notes were awarded at a rate of 0.924%, down seven basis points from the July sale, as permanent investors bought 55% of the issue. The Treasury sells 10-year notes tomorrow and 30-year bonds on Thursday. Bloomberg reported that PIMCO, the world’s biggest bond fund, lowered its holdings of U.S. government debt.

European stocks were dragged down by Germany, where a key investor confidence index dropped into the single digits. The ZEW Center’s index of investor and analyst expectations plunged to 8.6 in August from 27.1 in July and well below forecasts of 17. The index, which has dropped every month this year, is now at its lowest level since December 2012. The current conditions index dropped to 44.3 from 61.8 while a measure of expectations for the euro area fell to 23.7 from 48.1. In response, Germany’s DAX index fell 1.2% following Monday’s 1.9% gain. The index is now down more than 9% since hitting a record close on July 3. German bunds were largely unchanged. The other main country stock indexes were mostly lower except for Spain. The broadly-based Stoxx Europe 600 fell 0.2%. The euro remained weak; it’s down more than 4% since a recent peak on May 6.

Asian stocks were mostly higher for a second straight day. Both the Nikkei 225 and the Hang Seng index both gained 0.2% while India’s Sensex jumped 1.4%. Korea’s KOSPI index rose 0.1% but the Shanghai composite slipped by that amount.

The U.S. government ran a $95 billion deficit in July, cutting the cumulative shortfall so far this fiscal year by 24% compared to the previous year. The deficit for the fiscal year that began last October now totals $460.5 billion through July, down from $607.4 billion in the same period a year earlier. Revenue rose 8% compared to a year earlier, while spending rose 1.2%. A good part of that revenue gain came courtesy of the Federal Reserve, which paid the Treasury more than $10 billion in July, up $4 billion versus the same month last year. The Fed has paid the Treasury more than $84 billion since the start of the fiscal year thanks to earnings on its giant portfolio.

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

  1. August 13: Retail sales (July); 10-year Treasury note auction.
  2. August 14: Weekly unemployment claims; 30-year Treasury bond auction.
  3. August 15: Industrial production (July); producer price index (July); University of Michigan consumer sentiment index (August); New York Fed Empire State manufacturing survey (August).
  4. The Atlanta Fed’s new GDP forecasting model: GDPNow

Copyright © 2014 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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