Eurozone Concerns Impact Negatively on Wall Street
With some analysts comparing the current volatility on Wall Street with that experience in 2008, there is no doubt that world-wide markets are reflecting investor uncertainty, mostly driven by the ongoing crisis in Europe. May has not been a good month for the Dow as it has already lost more than 6 percent and looks set to close the month on a low note, registering its first losing month since September 2011. Yesterday saw the Dow closing at 12,419.32, being down 1.3 percent (160.83 points), while the Standard & Poor’s 500 index dropped 19.10 points to close at 1,313.32 and the Nasdaq composite index lost 33.63 points to end the day at 2,837.36. While the drop in the price of oil caused energy stocks to take the hardest hit, stocks in all major industries reacted negatively on Wednesday.
With Spain’s fourth-largest bank, Bankia, receiving a $23.8 billion government bail-out to cover bad real estate loans, investors are reportedly concerned that the problem will spread to other banks in the country. A number of these banks cashed in on the real estate bubble by lending heavily, and fears are that the Spanish government may not be able to withstand a crash in the real estate market. The yield on Spain’s 10-year bonds – a significant indicator of the country’s ability to meet its debt obligations – climbed to 6.69 percent, being the highest since the 2002 launch of the euro.
With Greece facing a second election on June 17, an opinion poll has revealed that the far-left Syriza party, which opposes the system of bailouts and sharp budget cuts, is rapidly gaining support. While there is plenty of speculation about what would happen if any given party wins, it appears that if the Syriza party wins, the country may be forced to exist the euro and revert to the drachma. General opinion among investors is that a meaningful and sustained rally on Wall Street is unlikely before the Greeks return to the polls and some stability is achieved.
The European Commission, in the meantime, has called on the 17 countries using the euro as currency to form a banking union to, among other things, assist national banks that may need bailing out. The Eurozone countries are Austria, Belgium, Cypus, Estonia, France, Finland, Greece, Germany, Italy, Ireland, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, Slovakia and Spain.