Although American equity markets started the day on a high note thanks to M&A activity, then soon fell back thanks to another downgrade of Greek debt to finish the day flat. The Dow and S&P 500 both finished the day ahead by one point each while the Nasdaq suffered minor losses of 0.2% thanks to continued weakness from the tech sector. Commodity markets were not as fortunate as natural resources plunged across the board thanks to growing concerns over economic growth in many countries. Gold and silver were both in the red as the yellow metal finished down 0.8% and silver plunged by 4.4% in the session. Energy markets sold off as well, as a 2.3% loss was seen in the crude oil markets although Brent managed to finish the day a few cents higher despite a rough day for WTI crude. Grains were also weak, led by a 2% loss for rice and wheat while other softs declined marginally as well to open up the week.
This flight away from risky commodities came after Standard & Poor’s slashed its long-term sovereign credit rating on Greece to CCC from B with a negative outlook as well. This downgrade, which represents a three level cut, further calls into question Greece’s ability to pay off its debt, especially considering that yields on two year Greek bonds are now approaching 27%. “The pressure is rising and Greece is going to have very little flexibility and eventually if they don’t execute the plans they are exposed to the risk of not receiving a tranche of loan,” said Vincent Chaigneau, head of rates strategy at Societe Generale. “We need to see results in terms of budget reduction and the market is pretty convinced now that at some point down the line Greece is going to default.”
One of the biggest ETF winners on the day was the Financial Select Sector SPDR (XLF) which gained 1.0% to start the week. These gains came after some early merger and acquisition activity boosted market sentiment across the board as VF Corp went for a $2 billion buyout of Timberland and Roark Capital paid close to $430 million for Arby’s Restaurant Group. This news helped to set a bullish tone for financials in particular as some of the country’s biggest banks and financiers surged on hopes of similar activity taking place in the weeks and months ahead. In fact, the country’s five biggest banks by market cap were all up at least 1.5%, led by a 3.3% gain for Citigroup. Investment companies also gained on the day as Goldman Sachs added 1.2% and Morgan Stanley gained close to 3%. Despite these gains, 2011 has been a pretty rough year for financials as XLF is down close to 6.1% so far this year including a 9.4% loss in the past quarter alone [see more charts of XLF here].
One of the biggest losers in the ETF world to open the week was the United States Natural Gas Fund (UNG) which sank by 2.5% in Monday trading. Today’s losses, which reversed much of last week’s gains, came as analysts revised their predictions for the weather in the Northeast, saying that milder weather should be expected. This reverses the earlier expectation which called for warmer-than-normal temperatures in the region, which is one of the country’s most populous and biggest consumers of electricity. “Instead of being much higher than normal, temperatures are pretty much below normal this week,” said James Williams, an economist at WTRG Economics, an energy research firm in London, Arkansas. “Gas has climbed near the top of the range.” Thanks to this, UNG tumbled to start this week of trading, on volume that was slightly above average at 13.8 million shares. Nevertheless, despite this drop, UNG is still up 5.2% over the past two weeks suggesting that investors are increasingly betting on a hot summer full of natural gas drawdowns [see more fundamentals here].
Disclosure: No positions at time of writing.