Benchmarks declined for the second day in a row following news that Cyprus is on the brink of a financial crisis and needs to be bailed out. These developments rekindled fears of the Euro Zone crisis among investors. Financial stocks were the worst hit among the top ten S&P 500 industry groups while the technology sector was the only gainer.
The Dow Jones Industrial Average (:DJI) lost 0.4% to close the day at 14,404.21. The S&P 500 decreased 0.6% to finish yesterday’s trading session at 1,552.10. The tech-laden Nasdaq Composite Index lost 0.4% to end at 3,237.59. The fear-gauge CBOE Volatility Index (:VIX) surged 18.2% to settle at 13.36. Consolidated volumes on the New York Stock Exchange, American Stock Exchange and Nasdaq were roughly 5.8 billion shares, below 2012’s average of 6.48 billion shares. Declining stocks outnumbered the advancers. For the 36% that advanced, 61% declined.
The Dow Jones ended its gaining streak on Friday after touching an all-time high. In spite of posting losses on two consecutive days, the blue-chip index is still up 10.3% this year. The Dow started yesterday’s trading session by losing about 100 points but recovered later in the day. These developments pushed the S&P 500 beyond its earlier peak which it achieved in 2007. The CBOE volatility index surged 18.2% on fresh fears after touching its lowest level in the last six years.
Investor sentiment was dampened on Monday following fresh concerns over the Euro Zone. Plans to bailout Cyprus from a financial crisis were revealed which pushed benchmarks into the red. The intention is to raise money by imposing tax on the bank deposits in Cyprus. This could destabilize the financial institutions in the euro zone area. The sum of money required for Cyprus’s bailout is about 10 billion Euros, from the originally estimated 17 billion. The size of the country’s economy is expected to be about 18 billion. Though Cyprus only constitutes around 0.2% of the euro zone’s output, such drastic steps could spread the contagion to other euro zone countries.
According to the deal struck on Saturday, bank deposits lower than 100,000 euros would be taxed at 6.7%, while deposits above that level would be taxed at 9.9%. However, finance ministers supported a tax of 15.6% on deposits above 100,000 euros. The government suggested not imposing tax on deposits below 20,000 euros. This decision is uncertain as of now, but will be put up for parliamentary vote on Tuesday.
The President of Cyprus, Nicos Anastasiades, supported the law makers’ decision of taxing bank accounts. He believes that this is a “one-off measure” which can save the financial system from crumbling. “A bank collapse would cause indescribable misery,” he added.
By implementing the tax, lawmakers intend to raise about 5.8 billion euros. As of January end, Cyprus banks held 68.4 billion euros of which 63% is held by domestic depositors, 31% from outside the euro zone area and 7% from other nations within the euro zone area.
Financial stocks were the worst hit following revelations of the bailout plan. Financial Select Sector SPDR (XLF) lost about 1.1%. Stocks such as JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), Goldman Sachs Group, Inc. (NYSE:GS), Wells Fargo & Co (NYSE:WFC) and Bank of America Corp (NYSE:BAC) lost about 1.0%, 2.2%, 1.9%, 1.2% and 0.1%, respectively.
Technology stocks were the only gainers among the top ten S&P 500 industry groups. Stocks such as Apple Inc. (NASDAQ:AAPL), Hewlett-Packard Company (NYSE:HPQ), Microsoft Corporation (NASDAQ:MSFT), Verizon Communications Inc. (NYSE:VZ) and Sprint Nextel Corporation (NYSE:S) gained 2.7%, 2.9%, 0.2%, 1.5%, and 1.0%, respectively.
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