Despite an early morning surge, American equity markets soon lost momentum and finished the day lower across the board. The Dow retreated by a modest 19 points while the Nasdaq and S&P 500 suffered more dramatic losses of 0.4% and 0.5%, respectively. Commodities also suffered broad weakness as a stronger dollar weighed on everything from gold (down 1.7%) to cotton (down 1.6%). Meanwhile, Treasury markets also continued their recent slump as yields continued to surge higher; the ten year note is now approaching 3.65% while the 2 year is closing in on the 0.7% level.
Today’s biggest news came out of Europe, where concerns over sovereign debt once again weighed on the markets. This time traders focused in a report that Moody’s may downgrade its ratings on Spanish debt, while S&P bumbled their ratings outlook for Belgian debt from ‘stable’ to ‘negative’. “The ongoing stresses and strains renew focus on the need for a permanent solution and the upcoming EU leaders summit, which does not seem poised to present such a solution,” said David Watt, senior fixed-income and currency strategist at RBC Capital Markets. This news helped to sink the markets by afternoon and push traders back into other currencies as a way to hedge against the ongoing storm in Europe. As a result, demand for alternative currencies to the dollar, such as precious metals, sank significantly on the day–highlighted by a 3.2% slide in silver prices.
One of the biggest winners on the day was the PowerShares DB USD Index Bullish Fund (UUP), which rose by 1.1% in Wednesday trading. Today’s gains came at the expense of the euro, which lost 1.1% against the greenback in Wednesday trading as concerns over Spain helped to temper demand for the common currency. Traders still remain skeptical of the euro zone’s plan to deal with troubled members, so the dollar is likely to gain in the near term as a result of this uncertain outlook. “You still have the debt concerns in Europe, that’s what’s weighing down on the euro,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “It’s the overall European situation and the uncertainty of how it’s going to be resolved.” [see more on UUP's fact sheet]
One of the biggest losers in the ETFdb 60 was the iPath DJ-UBS Copper ETN (JJC), which tumbled by 2.6% on the day. JJC sank as traders lowered expectations in terms of demand for the important base metal, while a stronger dollar also helped to push metals down as well. Ongoing speculation that China will raise rates also did not help the red metal as a rate hike by the nation looks likely to cool off the economy and push demand for copper down in the near term. Today’s slide could mark the end of the recent surge in copper prices; JJC has gained 10.5% over the past two weeks suggesting that the metal’s run may be nearing an end if the data does not begin to pick up soon [see fundamentals of JJC here].
Disclosure: No positions at time of writing.