NEW YORK (Reuters) - U.S. stock markets tumbled on Tuesday, on downbeat trading guidance from JP Morgan and worries over Italy putting the S&P 500 and Dow Jones Industrial Average on track for their biggest one-day drops in seven weeks.
A political crisis in Rome, and the threat to the euro project it represents, triggered a rush to traditional safe havens like U.S. debt, pulling down U.S. 10-year bond yields and in turn spurring losses for U.S. banks.
JP Morgan corporate and investment bank chief Daniel Pinto drove another round of selling by saying his bank’s second-quarter markets revenue would be flat on the year.
GREGORY DACO, HEAD OF U.S. MACROECONOMICS, OXFORD ECONOMICS, NEW YORK
“You have a renewed outlook on risk, whether it’s Italy, the protectionist tone or higher oil prices. You are seeing the market repositioning with yields lower, stocks struggling and the dollar rallying against the euro. The situation in Italy is not going to be short-lived.”
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER AT ALLIANZ, NEWPORT BEACH, CALIF
“In the short-term, we are witnessing technical contagion in both bonds and stocks as ‘fast money’ investors who have been caught off base scramble to square positions, including record shorts in Treasuries and over-extended long carry trades. “If the political situation in Italy worsens, the longer-term spillovers would be felt in the U.S. via a stronger dollar and lower European growth. This would act as a headwind, especially for some multinationals’ corporate profits. Having said that, the domestic economy is resilient enough to avoid a growth derailment.”
“When you look at lower yields and the lower energy, it’s taking a real bite out of the energy complex and certainly the financial complex.”
“I don’t think anything has changed (in the last hour or so) but when you call into question, one of the larger economies in the euro zone, and what that will mean to the stability of the euro zone, its certainly going to manifest itself into a larger punishment than we saw this morning. So compare what our stocks were doing versus European, versus across the board, we were down 40 or 50 bps and once we breached 2700 on S&P, all it takes is for the guys to decide that it was time to take the selloff seriously and that’s where we really saw the pressure.”
BRIAN BATTLE, DIRECTOR OF TRADING, PERFORMANCE TRUST CAPITAL PARTNERS, CHICAGO
1 - “It’s all the see-saw of trying to figure out how real the Italian political threats are … This isn’t Greece or Crete. This is Italy, so this matters. The euro skepticism is real so that has put fear into the market and has put money back into the dollar. The euro is at $1.15. We have a raging rally in long-dated treasuries.”
“The 30-year bond is big and its deep and it takes a lot to move it. We’re almost 2 points in price higher.”
2 - “The drama in Europe is about Italy.”
“This takes the bid out of the euro, euro bonds and makes the euro currency cheaper, and interest rates higher. That money comes to North America, the dollar and U.S. Treasuries rally. The Italy political drama is about rates and currencies, not equities.”
“Stocks sell off on political instability that can diminish global demand, changes in currencies that will diminish demand for U.S. goods (denominated in expensive dollars).”
PETER CECCHINI, MANAGING DIRECTOR AND CHIEF MARKET STRATEGIST, CANTOR FITZGERALD, NEW YORK
“I’ve been skeptical and cautious about equities for a few months here, and the sort of developments in Italy, Spain and LatAm, what they really do is they don’t present new facts that are particularly devastating to the markets, but they get people to actually step back and think about risk.”
“Frankly, investors have been very complacent, and these sort of macro risks that people had forgotten, that existed, are all of a sudden front of mind for them.”
“With regard to U.S. equities, most of the catalysts are in the rear-view mirror. I think it’s a little bit easier for investors to say ‘I’d rather be a buyer than seller.’ Peak earnings are behind us, interest rates are rising slowly and the only reason why 10-year is down is because of the flight to quality.”
“Italian and Spanish banks, it may probably make sense for them to be down. European banks’ balance sheets are in a far worse shape than U.S. banks. I’m a bit surprised that U.S. banks are down in sympathy. U.S. banks I feel are just a bit extended and this is just an excuse.”
MICHAEL ANTONELLI, MANAGING DIRECTOR, INSTITUTIONAL SALES TRADING, ROBERT W. BAIRD, MILWAUKEE
“Investors have bad memories of times past. Anyone working in the market today remembers the last European crisis that happened seven years ago and has it burned into their memories.”
“The Italian bond market has had a hell of a day. The Italian two-year yield moved from a little less than 1 percent all the way to 2.7 percent in one day. That’s a bigger move than (during) the entire crisis in 2011. Italy is a huge part of the international banking system. These kinds of moves being so large, they tend to panic risk assets, even over here (in the United States).”
“Later this week, things will smooth out. If Italy came out today and said it was going to leave the European Union, certainly that would be a market-changing event. But there are no clues that that will happen any time soon. The market tends to price in the worst-case scenario and then walk it back.”
STOCKS: The Dow unofficially closed down 393.13 points, or 1.59 percent, its biggest daily percentage fall since April 24. Likewise for the S&P 500, which unofficially closed 1.16 percent lower. The Nasdaq ended down 0.52 percent.
TREASURIES: The yield on the U.S. 10-year Treasury note fell to 2.7738 percent.
VIX: The Cboe volatility index jumped 38 percent to 18.27
Dollar: The U.S. dollar index was up 0.64 percent
Compiled by Alden Bentley