US stocks scuttle global rally as attention shifts from Cyprus to Europe’s troubled economy
Stocks reversed an early gain on Wall Street Monday as traders returned to worrying about the European economy. Optimism about a deal to prevent financial collapse in Cyprus had briefly pushed the Standard & Poor’s 500 index to within a half-point of its record closing high, but the indexes soon turned negative, scuttling a rally in Europe.
The S&P 500 was down 0.4 percent just before 1 p.m. Eastern time. The Dow Jones industrial average fell 0.6 percent, and the Nasdaq composite average slipped 0.5 percent.
Wall Street had opened higher, following markets in Europe and Asia. Traders were relieved that international lenders agreed early Monday to release 10 billion euros ($13 billion) of emergency rescue funds for Cyprus. The European Central Bank will continue to support the nation’s foundering banks. In exchange, Cyprus will shrink its banking industry, cut its budget, implement economic reforms and privatize some state assets. The measures will result in heavy losses for its banks’ bondholders and people with large deposits in bank accounts.
The deal to save Cyprus’ banks erased a source of anxiety for investors, who have traded for more than three years under the cloud of a debt crisis in Europe. The fear is that a heavily indebted country will default on its financial obligations and be forced to exit the shared currency. That could cause the eurozone to unravel, deepening the recession there and roiling international financial markets.
Stocks turned negative about an hour into the trading day as fear about Europe’s economic woes returned to the fore. Business activity in nations that use the euro contracted more quickly in March, according to a survey of purchasing executives published Thursday by Markit, a data provider. Markit’s Eurozone PMI fell to 46.5 from 47.9 in March, its worst decline in four months.
The Cyprus pact reminded traders that Europe still needs a long-term economic fix, said David Kelly, chief global strategist at J.P. Morgan Funds. Business activity in nations using the euro has declined continually since September 2011, according to the Markit PMI. The region’s economy shrank 0.6 percent in 2012, according to Eurostat, the statistics office of Europe’s central governing body.
European policy makers have avoided a financial crisis by flooding the market with cash, but they haven’t addressed economic hardship on the ground, Kelly said. Lenders are demanding harsh concessions like those imposed on Cyprus in exchange for bailout money. He said that’s tough to swallow for people facing high unemployment and government cutbacks in Greece, Italy, Spain and other countries that received bailouts.
“If they’re going to end up broke anyway,” Kelly said, it will be “harder and harder for people to make the sacrifices that Europe is demanding of them.” That could lead voters in bailed-out countries to resist lenders’ terms, increasing political and economic instability in Europe and weighing on global markets, he said.
Concern about Cyprus last week pushed U.S. stock indexes to only their second weekly loss this year. Investors watched closely as the small, Mediterranean island scrambled to satisfy its lenders and prevent its banks from collapsing.
The indexes rose Friday, in part because of strong earnings from U.S. companies. The increase also reflected traders’ optimism that Cyprus would achieve a bailout deal, said Anthony Conroy, head trader at ConvergEx Group, which provides technology to support big traders like investment advisers and hedge funds. The Dow rose 91 points on Friday, the S&P 500 11 points.
Still, Conroy said, traders expect more turbulence from Europe before the crisis has been resolved. Given the uncertainty, it’s not surprising that stocks would veer between positive and negative, he said.
“I think there’s more to come,” Conroy said. “When you have concern, you have volatility, and you’re seeing volatility in here,” he said.
European stocks were up when Wall Street opened Monday, but turned lower shortly after Wall Street’s gains evaporated. France’s CAC-40 was down 0.9 percent, London’s FTSE 100 0.1 percent and Germany’s DAX lost 0.4 percent.
Earlier, Asian stocks closed mostly higher on optimism about the Cyprus deal.
The S&P 500 fell seven points to 1,550. The loss was offset in part by big jumps for Apollo Group Inc. and McGraw-Hill Cos. Computer maker Dell Inc. also lifted the index as a bidding war broke out among investors who want to take the company private.
The Dow fell 83 points to 14,428. The Nasdaq dropped 15 points to 3,229.
As the final week of trading this quarter kicks off, the indexes are holding onto gains built during the long rally earlier this month. The Dow is up nearly 10 percent, the S&P 500 about 8.5 percent.
Conroy expects stocks to maintain their recent gains as short-term dips draw more traders into the market. Kelly agreed, noting that stocks typically decline in the last week of a strong quarter, as investors seek to lock in their gains.
Among the companies making big moves:
— Apollo Group soared after the for-profit education company said its quarterly net income exceeded Wall Street’s expectations. The stock rose $1.77, or 11 percent, to $18.81.
— Dollar General’s quarterly net income rose as the operator of discount stores attracted more customers and sold more goods. The stock rose 31 cents, or 0.6 percent, to $50.38.
— Dell rose 43 cents, or 3 percent, to $14.57. The company received competing bids from activist investor Carl Icahn, who offered $15 per share, and buyout firm Blackstone Group, which proposed a deal worth $14.25 per share. Founder Michael Dell had been in talks to take the company private for about $13.65 per share.
— McGraw-Hill Cos. rose strongly after it said it will resume an accelerated share buyback program capped at $500 million. The media company will use cash generated by the recent sale of its education business. Its stock rose $1.47, or 3 percent, to $49.84.
Daniel Wagner can be reached at www.twitter.com/wagnerreports.