U.S. Stocks Fall as Government Deficits Weigh on Global Recovery

Strategic Insights -

U.S. stocks declined sharply on Tuesday, pulling benchmark indexes down from 18-month highs, as concerns over government deficits weighed on the market and a Fitch Ratings downgrade of Portugal's credit rating and a UBS economist's warning of Greece's impending default added to the uncertainty. The Dow Jones Industrial Average dropped 0.5 percent, led lower by Procter & Gamble and Chevron, while General Mills fell 1.9 percent after disappointing earnings forecasts.

Key Takeaways:

  • The Dow Jones Industrial Average dropped 0.5 percent to 10,836.15, its first decline in three days, as government deficits and uncertainty over funding weighed on the market.
  • Fitch Ratings downgraded Portugal's long-term foreign and local currency issuer default ratings to AA- from AA, citing deteriorating public finances.
  • UBS economist Paul Donovan warned that Greece is likely to default at some point, and Europe's failure to address this challenge will hurt its common currency.
  • The auction of $42 billion of five-year Treasury notes drew a yield of 2.605 percent, higher than the 2.556 percent average estimate of eight dealers.
  • The U.S. government faces significant fiscal challenges as it attempts to finance a budget deficit projected to widen to a record $1.6 trillion in the fiscal year ending September 30.
  • The safety trade is driving the dollar higher, which is bearish for commodities in the near term.
  • General Mills fell 1.9 percent after the company forecast earnings that disappointed investors.
  • U.S. stocks retreated even after a government report showed that orders for long-lasting goods increased in February for a third straight month.

Statistics:

  • The Dow Jones Industrial Average dropped 52.68 points, or 0.5 percent.
  • The Dollar Index jumped 1.3 percent to 81.982, a 10-month high.
  • The S&P 500 Index dropped 0.6 percent to 1,167.72.
  • The U.S. government's budget deficit is projected to widen to a record $1.6 trillion in the fiscal year ending September 30.
  • The auction of $42 billion of five-year Treasury notes drew a yield of 2.605 percent, higher than the 2.556 percent average estimate of eight dealers.

Sources:

  • Bloomberg News (report on durable goods orders)
  • UBS Investment Bank (statement by Paul Donovan on Greece's default)
  • Fitch Ratings (credit rating downgrade of Portugal's credit rating)
  • Euclid Infotech Pvt. Ltd. (original article)