While You Were Sleeping: Wall St falls on prospects of rate hike, Greek debt talks

Tuesday 9th June 2015

Stock benchmarks on Wall Street extended their slide, with the Standard & Poor’s 500 Index sinking to a month low, as investors weighed the implications of interest rate hikes starting in September.

US stocks added to their decline last Friday, when figures showed the world’s biggest economy added 280,000 jobs in May and wages rose more than expected. Fourteen of 16 economists in a Reuters survey expect the Federal Reserve to hike rates from near zero in September and make another increase before the end of the year.

According to the Reuters poll, the federal funds rate would rise to 0.625 percent by the end of 2015 and reach between 1.25 percent and 2.25 percent by the end of 2016.

“The May jobs number is pointing in the direction of a more likely interest rate hike. The market is cringing at that idea," Frank Davis, director of sales and trading at LEK Securities in New York, told Reuters.

The Standard & Poor’s 500 Index fell 0.7 percent to 2,079.28 at the 4pm close in New York. The Dow Jones Industrial Average declined 0.5 percent, to 17,766.55 and the Nasdaq Composite Index shed 0.9 percent to 5021.627. US Treasury yields rose.

Investors are concerned equity markets are becoming more risky, having basked in record low interest rates for so long, yet with earnings growth held back by a sluggish US economy. US company profits are forecast to rise 1.4 percent this year, Bloomberg reported, citing analyst surveys. That would be the weakest growth at the start of a tightening cycle since 1980, it reported.

“People talk about how equities have done well six months after tightening but the Fed has never been at zero for this long,” Andrew Brenner, head of international fixed income for National Alliance Capital Markets, told Bloomberg. “It’s inevitable an equity correction is coming.”

The Chicago Board Options Exchange Volatility Index, known as the VIX, rose 6.6 percent to 15.15, the highest since the start of April, following two weeks of gains.

Airline stocks helped drive the S&P 500 lower, with Delta Air Lines sinking 4.8 percent and American Airlines Group falling 4.3 percent after Qatar Airways called for the aviation industry's largest trade group to address protectionism, Reuters reported. Qatar’s statement was in retaliation at US airlines campaigning against subsidised competitors from the Gulf states including Emirates, Etihad Airways and Qatar.

"Any rollback of liberal market access and Open Skies policies will reverberate across the whole world and will lead to retaliatory protectionism affecting all aspects of trade," Qatar Airways' CEO Akbar Al Baker told the International Air Transport Association meeting in Miami.

Apple shares fell 0.5 percent to US$127.98, having climbed about 37 percent in the past 12 months. The tech giant unveiled its new music streaming service on Monday, Apple Music, its late entry into the streaming market.

Apple Music has a service to connect artists and fans and includes a global radio station called Beats 1. Apple is betting that its deep relationships with music companies, a global brand and iTunes customer base will lure consumers to its US$9.99 a month service.

Apple CEO Tim Cook also announced the next version of the operating system for its Apple watch.

The US dollar index fell to 95.193, the lowest since mid-May after US President Barack Obama was cited in media reports from the Group of Seven summit in Germany saying a strong US dollar was a problem. Obama later denied the reports.

"Maybe he didn't say it, but the report highlighted an undercurrent of discomfort with the level of the dollar and its negative impact on the US economy and the global economy," John Praveen, chief investment strategist at Prudential International Investments Advisers, told Reuters.

Obama used the G-7 summit to urge Greece and its creditors to find a compromise that will allow the EU member nation to avoid default and remain in the common currency region and the G-7 member states showed a united front at the meeting.

“There was unanimity of opinion in the room that it was important for Greece and their partners to chart a way forward that builds on crucial structural reforms” and returns to growth, a White House spokesman said after a meeting between Obama and German Chancellor Angela Merkel.

BusinessDesk.co.nz

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