Stock Market News for August 2, 2011

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The benchmarks’ roller-coaster ride finally came to a stop with markets losing modest points, as manufacturing data spoiled the party after Obama and congressional leaders confirmed they had reached an agreement on the debt ceiling. Investor mood swayed from positive to cautious after disappointing ISM data and uncertainty prevailed ahead of the lawmakers vote on the borrowing limit issue.


The Dow Jones Industrial Average (:DJIA) lost 10 points, or 0.1% to settle at 12,132.49. Earlier the blue-chip index had soared almost 140 points riding on the announcement by President Obama and the congressional heads. However, these gains were washed out by disappointing manufacturing data. The Standard & Poor 500 (S&P 500) shed 0.4% to close at 1,286.94. The Nasdaq Composite Index also lost 0.4% and finished the day at 2,744.61. On the New York Stock Exchange, consolidated volumes remained low at 4.4 billion shares and the advance decline ratio was almost even.


Late on Sunday, President Obama said: “I want to announce the leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default.  Thereafter, it was almost a certainty that the benchmarks would move out of the negative zone and into the green on Monday. However, this was preceded by another statement where he said: “There are still some very important votes to be taken by Congress, and therefore one could not completely discard the prevailing uncertainty as many doubted if Congress will approve of the legislation.  The President has pushed hard for the Bill and insisted that Congress members support the deal. House Speaker John Boehner also backed the deal and held a conference call with Republican members to seek their support.


The deal involves a two-stage process which raises the debt ceiling and entails deficit reduction measures amounting to $2.4 trillion. Deficit reduction of $900 billion will take place over 10 years in the first stage, and in the next stage the congressional committee will approve an additional $1.5 trillion in deficit-reduction measures over 10 years. However, $1.2 trillion worth of spending will automatically take effect if the committee fails to approve the cuts. President Obama, Senate Democratic leader Harry Reid and Senate Republican leader Mitch McConnell all opined that the deal will clear the air of a possible default. However, some believe that with parts of the deal lacking clarity, this does not completely rule out the possibility of a rating downgrade.


It is now left to lawmakers to cast their votes, and they were expected to do so later during the day or early on Tuesday. Nonetheless, the deal was required to be approved by midnight Tuesday to avoid a default. Investors kept their fingers crossed, as though Senate looked likely to pass the agreement, the House of Representatives might give the bill a tough ride.


As sentiments turned cautious ahead of the final fate of the debt deal, manufacturing data dampened investor sentiment, reflecting weakness in the economy. The Institute for Supply Management said the U.S. manufacturing sector expanded at its slowest rate in two years in July. The PMI or the manufacturing gauge receded 4.4 percentage points to 50.9% in July, reflecting the worst reading since July 2009. Also, production and employment slowed down in July as compared with June and new orders reflected contraction for the first time since June 2009. The ISM index has dropped 9.5 percentage points since April and this is the worst three-month drop since September-to-November 2008.


Healthcare stocks were one of the leading decliners among the 10 groups in the S&P 500. This decline occurred after the government said it plans to reduce Medicare reimbursement rates by 11%. These cuts are not linked to the debt deal. Stocks like Aetna Inc. (NYSE:AET), Unitedhealth Group, Inc. (NYSE:UNH), Abbott Laboratories (NYSE:ABT) and St. Jude Medical Inc. (NYSE:STJ) dropped 2.9%, 3.2%, 1.7% and 1.3%, respectively.


The debt deal also spurred concerns that the cuts may affect the Pentagon’s defence budget. Stocks in the sector including, Lockheed Martin Corporation (NYSE:LMT), Boeing Co. (NYSE:BA), Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) and Northrop Grumman Corporation (NYSE:NOC) lost 1.7%, 0.2%, 1.9% and 1.5%, respectively.


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