Stock index futures dropped sharply after Moody’s Investors Service said it might cut the United States’ triple-A rating due to the rising possibility its US$14.3 trillion (RM42.3 trillion) debt ceiling might not be raised by the August 2 deadline. Failure to increase the country’s borrowing limit in time would result in a US default, which could roil financial markets.
Concerns about the debt ceiling have been a headwind for equities as no budget deal has been brokered. S&P futures slumped on the news but recovered modestly, and were down 4.8 points, or 0.4 per cent.
“What has been beginning to spook Moody’s and some other people is that Congress may be dumb enough to actually default on the debt,” said Cliff Draughn, chief investment officer of Excelsia Investment Advisors in Savannah, Georgia. “Clearly any instability of a large nation with the world’s reserve currency defaulting on its debt — it’s never happened before.”
In yesterday’s session, the three major US stock indices rose more than 1 per cent at their peak after Fed chairman Ben Bernanke suggested the Fed would consider additional measures to support the economy if the outlook got worse. Energy and materials stocks led gains, but the rally fizzled in afternoon trading.
“Bernanke’s comments were a positive this morning, but we had a little too much happiness early on,” said Richard Sichel, chief investment officer of Philadelphia Trust Co. “The comments were not upbeat by any means, and obviously, no one wants the economy to get to the point where more stimulus is needed.”
The Fed’s US$600 billion bond-buying effort, known as QE2, has contributed to huge equity gains since September.
In testimony to the House Financial Services Committee, Bernanke said “the recent economic weakness may prove more persistent than expected . . .” implying a need for additional policy support.
Stock investors had put a low probability on any more stimulus from the Fed, but June’s dismal jobs report altered some perceptions.
The CBOE Volatility Index, Wall Street’s fear gauge, ended up just 0.2 per cent after dropping nearly 9 per cent to a session low on the Fed chairman’s comments. Over the past three days, the VIX had climbed almost 25 per cent while the S&P 500 lost about 2.3 per cent, pressured by weak earnings and concerns over Europe’s debt crisis.
The Dow Jones industrial average rose 44.73 points, or 0.36 per cent, to close at 12,491.61. The Standard & Poor’s 500 Index gained 4.08 points, or 0.31 per cent, to 1,317.72. The Nasdaq Composite Index advanced 15.01 points, or 0.54 per cent, to 2,796.92.
Yum up late, oil stocks rise
After the closing bell, Yum Brands Inc rose 2.9 per cent to US$57.20 in extended trading after the fast-food chain operator reported a better than expected profit and raised its full-year profit view. But shares of US hotel chain Marriott International Inc fell 3.4 per cent to US$35.89 after the bell following the company’s results.
During the regular session, News Corp shares jumped 3.8 per cent to US$15.93. It was the Nasdaq’s most active name after it announced that it had withdrawn a US$12 billion bid to buy the 61 per cent of broadcaster BSkyB that it did not already own. Volume in the media company’s stock was its highest since December 17, 2004, when it was officially added to the S&P 500.
News Corp is at the centre of allegations that one of its tabloid newspapers committed criminal acts.
Energy and material stocks were the top gainers, though they were off their highs as crude oil cut its gains. The S&P energy sector index rose 0.7 per cent, while August crude futures gained 62 cents, or 0.6 per cent, to settle at US$98.05 a barrel. Baker Hughes Inc was one of the top energy-sector gainers, rising 3.3 per cent to US$74.83.
Shares of JPMorgan Chase & Co rose 0.6 per cent to US$39.62 while Google Inc climbed 0.8 per cent to close at US$538.26. JPMorgan is scheduled to report its results this morning, while Google is slated to report after the market’s closing bell today.
Wall Street got an early boost from overseas data that showed China’s economy grew faster than expected in the second quarter, but there was still caution over developments in Europe. Moody’s downgraded Ireland’s debt to junk late on Tuesday and said Ireland was likely to follow Greece in needing a second bailout. Irish bond yields jumped to record highs.
Volume was light, with about 6.83 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year’s daily average of 8.47 billion.
Advancing stocks outnumbered decliners on the New York Stock Exchange by a ratio of about 2 to 1, while on the Nasdaq, about nine stocks rose for every four that fell. — Reuters
