Global growth and rising interest rates in Asia and Europe put the U.S. bond market under pressure
After a modest start for the week ignoring the China stocks sell-off, US market plunged during the mid-week trading days during the past week. But at the end, it did try to recoup back some of the week’s loss. Nevertheless, all the three indices lost 1.6% - 2% going into close at the week’s end on Friday, 8 June 2007.
Unforeseen strength in the services sector and comments from Fed Chairman Ben Bernanke about housing and the economy dashed investors' hopes for a reduction in interest rates any time soon. The rate fears coupled with rising oil and higher bond yield rattled the US market between Tuesday, 5 June and Thursday, 7 June. Yield on 10-yr note soared above psychological 5% level for the first time since August. It reached a level of 5.24% but closed the week at 5.11%.
All the three indices incurred substantial losses between Tuesday, 5 June 2007 and Thursday, 7 June 2007. DJIx itself lost 410 points between those three days. Nasdaq and S&P 500 lost 77 points and 47 points respectively. But on Friday, 8 June 2007, lower oil price and partial stabilization of bond yields powered a rally in the market and the indices closed higher for the day.
The Dow Jones Industrial Average lost 244 points for the week. Tech heavy Nasdaq lost 41 points while S&P 500 lost 29 points.
On the economic news front, mixed batch of May same-store sales came out that were impacted in part by rising gasoline prices. First quarter productivity was revised down to 1% from a previous read of 1.7%, while unit labor costs were shown to have risen a higher than expected 1.8% from the 0.6% rate initially reported.
During the week, the acquisitions news that hit the headlines were – Flextronics announced that it will acquire rival electronics manufacturer Solectron for approximately $3.6 billion. Steel stocks got a major boost on Friday after ThyssenKrupp reportedly said it is interested in U.S. Steel. Avaya also confirmed during the week that it is being taken private.
Executive Summary
For the week, DJIx is down by 1.8%, S&P 500 is down by 1.9% and Nasdaq is down by 1.6%. While the interest rate action weighed heavily on investor sentiment in the past week, the deal-making that helped fuel the recent rally in stocks continued. For the year, the Dow is up by 9.7%, Nasdaq is up by 6.6% and S&P 500 is up by 6.4%.
During the week, investors became quite worried after the European Central Bank raised its benchmark rate 25 basis points to 4%. Though the same is well below Fed’s 5.25%, it bothered traders who feared that a hike, here, is imminent.
Next week has options expirations that might push stocks in either direction as investors decide whether to leave options alone or exercise them. On the economic data front, the government will report on retail sales on Wednesday, 13 June, wholesale price inflation on 14 June and issue its monthly Consumer Price Index report on 15 June.