Posted on July - 16 - 2011

Debt Crises Intensifying Risk Aversion

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– The major U.S. index futures are pointing to a lower opening on Monday, with sentiment reflecting extreme caution and pessimism about the engulfing debt crisis. There has been an exodus away from risky bets and towards safe havens, with gold climbing above the $1,600-an-ounce level earlier in the global trading day before trimming some of its gains. Meanwhile, safe haven currencies, namely the Swiss franc, yen and dollar are also firming up.

Apprehension is writ all over the face of the markets, as the deadline for raising the U.S. debt ceiling looms large. At the same time, the fluid situation of the European sovereign debt crisis is also worrying traders. The rest of the global markets have reacted negatively, with the Asian markets ending moderately lower, while the European markets are seen trading notably lower. The uncertainties surrounding the twin crises may temporarily temper optimism surrounding earnings.

U.S. stocks snapped their winning run in the week ended July 15th, as concerns surrounding the European sovereign debt crisis and uncertainty about the raising of the U.S. debt ceiling before an August 2nd deadline sapped investors’ risk appetite.

Last Monday, the major averages continued to see weakness, as traders sifted through Friday’s job report and also reacted negatively to Chinese inflation data showing a spike in annual consumer price inflation to a 3-year high.

While stocks saw early strength on Tuesday amid optimism about QE III following Federal Reserve Chairman Ben Bernanke’s semi-annual monetary policy address before Congress, late-day weakness pushed the markets moderately lower. Despite a warning from Moody’s over the U.S. government bond rating, stocks advanced modestly on Wednesday, aided by some bargain hunting.

However, the major averages pulled back on Thursday despite the release of some fairly upbeat economic reports, as traders focused on the European debt crisis and another warning from Standard & Poor’s about the U.S. debt rating. The major averages advanced on Friday, thanks to a batch of strong earnings reports, trimming their losses for the week.

For the week ended July 15th, the Dow Industrials declined 1.40 percent, while the S&P 500 Index lost 2.06 percent and the Nasdaq Composite Index receded 2.45 percent.

Among the sector indexes, the NYSE Arca Airline Index fell 6.51 percent and the Philadelphia Semiconductor Index retreated 5.74 percent for the week, while the NYSE Arca Securities Broker/Dealer Index and the KBW Bank Index lost over 4 percent each. The Dow Jones Transportation Average moved down 3.72 percent, the Philadelphia Housing Sector Index declined 3.62 percent and the S&P Retail Index slid 2.16 percent. Meanwhile, the NYSE Arca Gold Bugs Index added 5.92 percent.

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