Closing Market Recap: Equities Fall Sharply as Negative Sentiment Grows

(CEP News) - Fear has gripped every sector of the financial market as one negative report after the other has taken its toll on equities, which closed below key support levels today.

The Dow Jones Industrial Average ended the day down 3.8%, while the S&P 500 ended the day down 4.5% and the NASDAQ closed down 4.2%.

The Dow Jones industrial average closed down 241 points to 7609, the S&P 500 closed down 38 points to 789 and the Nasdaq closed down 64 points to 1471. Canadian stocks also ended the day weaker as the Toronto S&P/TSX composite index closed down 299 points to 8379.

European stock markets closed in negative territory, with the Euro Stoxx down 46 points to 1893, the UK FTSE 100 down 101 points to 4034 and the German DAX down 150 points to 4217.

"There is a good chance that we could test the November lows," said Colin Cieszynski, market analyst at CMC Markets. "There's not a lot of positive data that is supporting markets right now."

The Empire State Manufacturing index released on Tuesday highlighted the weakening U.S. economy after the survey declined to -34.65 from the previous month's -22.20 level. The results were much worse than the consensus forecast of a -23.75 reading.

Also helping to drag down stock markets were concerns over restructuring plans to be released by General Motors and Chrysler. The reports will outline how the automakers intend to return to viability and repay their government loans. GM has received $9.4 billion in funding, and is expected to receive another $4 billion today, while Chrysler has received $4 billion.

The third piece of negative news was a report from Moody's warning that western European banks face downgrades due to significant exposure to financial problems in eastern Europe.

Mike McCarty, senior equity and options strategist at Meridian Equity Partners, is also looking for equity markets to eventually test their November lows. "I think you can say that the bad news just doesn't seem to stop and that is weighing down markets," he said.

The rising risk sentiment could be seen in currency markets as the U.S. dollar made significant gains across the board. The greenback broke through key levels against the Canadian dollar and the euro, and strategists expect more gains in the short term.

The Canadian dollar is down 0.0227 to 0.7903 against the U.S. dollar (1.2653 USD/CAD) and down 0.81 to 73.02 against the yen.

The U.S. dollar is up 0.64 to 92.37 against the yen and the Dollar Index is up 0.921 to 87.581.

The euro is down 0.0202 to 1.2601 against the U.S. dollar, up 0.0030 to 1.5941 against the Canadian dollar, down 0.0111 to 0.8844 against the pound sterling and is lower by 1.06 to 116.40 against the yen.

The pound sterling is down 0.0049 to 1.4250 against the U.S. dollar and up 0.0263 to 1.8029 against the Canadian dollar.

"Optimism is in very short supply," said David Watt, senior currency strategist at RBC Capital Markets. "USD was the king of the castle."

Rising fear sentiment could also been seen in fixed income markets as investors fled to U.S. Treasuries. The long end of the yield curve outperformed the short end, with the 2/10 yield curve flattening.

U.S. two-year yields are down 10.5 bps to 0.85%, with five-year yields down 21.8 bps to 1.65%, 10-year yields down 24.7 bps to 2.64% and 30-year yields down 19.1 bps to 3.48%. The Eurodollar September 09 contract is up 4.5 ticks to 98.68. The yield curve is flatter, with the 10/2-year spread down 14.2 bps to 178.88 bps.

The Canadian 10-year note is yielding 16.74 bps more than the U.S. 10-year note.

Yields on two-year Canadian government bonds are down 3.2 bps to 1.17%, with five-year yields down 10.2 bps to 2.01%, 10-year yields down 12.8 bps to 2.81% and 30-year yields down 11.9 bps to 3.55%. The September 09 BAX contract is flat at 99.30.

In Germany, returns on two-year German bonds are down 6.9 bps to 1.17%, with five-year yields down 8.0 bps to 2.06%, 10-year yields down 6.2 bps to 2.97% and 30-year yields down 3.1 bps to 3.61%.

Yields on UK two-year bonds are down 0.7 bps to 1.35%, with five-year yields down 3.0 bps to 2.50%, 10-year yields down 8.1 bps to 3.42% and 30-year yields down 7.1 bps to 4.04%.

Looking at commodity markets, gold is the top performer of the day as it continues its climb once again to $1,000. CBOT spot prices for the precious metal hit a high of $974.20 an ounce. At the same time, oil prices are close to testing the January lows of $32 a barrel.

WTI crude oil is down $1.53 to $35.15. The front month gold contract at the Chicago Board of Trade is up $30.40 to $971.50 per ounce.

Mike Glaser, futures broker at LaSalle Futures, said gold continues to be supported by safe haven flows as market participants try to protect their investments. Although gold continues to move higher, Glaser said there could be some resistance between $980 and $990.