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Stocks Falter Amid Korean Tensions, Irish Woes

CNBC.com
Tuesday, 23 Nov 2010 | 11:58 AM ET

Stocks continued to sink as the dollar rose Tuesday as investors grew skittish about the prospects of the Irish debt crisis spreading to other periphery euro zone countries as well as escalating tensions in Korea.

TheDow Jones Industrial Average fell more than 150 points after falling slightlyon Monday.

Chevron , Exxon Mobil, and Alcoa led the blue-chips lower. Hewlett-Packard rose and Pfizer rose.

The S&P 500 and the Nasdaq also plunged. The CBOE Volatility Index, widely considered the best gauge of fear in the market, soared more than 14 percent to nearly 21.

All key S&P sectors declined, led by energy, materials, and technology. Within financials, banks sank nearly 1.7 percent.

North Korea fired artillery shells at an island in South Korea, causing fatalities and extensive damage, while re-igniting the long-standing tensions between the two countries. The White House condemned the attack and demanded all further attacks be stopped.

Stocks were shaken by the news, particularly as it comes amid global worries over the potential long-term effects of the debt crisis in Ireland.

The Irish government was suffering fallout over its decision to accept a European bailout package, and is struggling to stay together in time to pass an austerity budget in two weeks. Meanwhile, Ireland's central bank Governor Patrick Honohan said that the country's banks are effectively for sale.

"The Korean thing couldn’t have come at a worse time," said Doug Lockwood, CIO at Hefty Wealth Partners, an investment firm.

Investors are concerned about Ireland's troubles spreading to bigger nations, particularly Spain, because of the potential effects on U.S. businesses that are increasingly relying on overseas consumers for revenue, Lockwood said.

"Our country is going through a lot of consolidation in the business environment, predomoinately on the employment side," he said. "That means we don’t have as many people buying or as many people borrowing."

Still, he said, businesses are getting stronger, and the U.S. economy is improving, and investors would take heart in the fact third-quarter gross domestic product was revised upward to 2.5 percent if they weren't concerned about the effects of a spreading contagion in Europe on U.S. corporations.

Meanwhile, fund managers aren't ready to abandon their South Korean investments in such big names as Samsung Electronics or Hyundai Motor because of the escalating tensions in Korea, Reuters reported.

European shares fell to a six-week closing low due to fears the Irish crisis would spread and Korean tensions.

Portugal, meanwhile, was bracing for speculative traders to turn to its bond markets next on the belief the country's financial troubles will make Portugal the next candidate for an EU bailout.

The dollar rose to a three-month high against a basket of currencies as investors sought the safety of the U.S. currency, while gold roseto about $1,367 an ounce.

Asian stocks closed mostly lower, while exchange-traded funds that track Korean stocks fell. The iShares MSCI South Korea exchange-traded fund slumped more than 5 percent. IQ South Korea Small Cap fell more than 6 percent, and the Korea Equity Fund fell nearly 5 percent.

In other news, the Federal Bureau of Investigationraided three hedge funds. The move was part of a wider investigation to uncover insider trading crimes in the industry.

J Crew confirmed it would be purchased by two private equity firms, including its former parent, for about $2.86 billion.

confirmed the purchase of J Crew Groupfor $43.50 a share, or about $2.8 billion. Shares of the retailer, which is expected to report quarterly results later, soared in the pre-market.

In earnings news, Hewlett-Packard's shares rose in pre-market trading after reporting Monday that profit and revenue beat expectations. The tech giant raised its fiscal 2011 revenue and earnings forecasts.

Campbell Soup shares fell after reporting its fiscal first-quarter earnings fell 8.2 percent as sales slowed.

The Federal Reserve was purchasing $1 to $2 billion in Treasury securities Tuesday morning in its eighth round of bond purchases to stimulate the economy. The Fed will buy more bonds in two rounds on Monday.

Also, the U.S. Treasury was scheduled to auction $35 billion in five-year notes at 1 p.m.

On the economic front, gross domestic product growth in the third quarter was revised to an annualized rate of 2.5 percentfrom a previous estimate of 2.0 percent, pulled higher by exports and stronger consumer and government spending, the Commerce Department said. The faster pace of growth was not enough to address high unemployment.

Existing home sales fell 2.2 percent to a seasonally adjusted annual unit rate of 4.43 million units from a 4.53 million pace in September, according to the National Association of realtors. Delayed foreclosures and tight lending standards may have played a role in the slowdown.

Bank industry earnings fell by nearly $7 billion in the third quarter, but were better than a year earlier, the Federal Deposit Insurance Corp. reported Tuesday. Net income for the industry was $14.5 billion, down from $21..4 billion in the second quarter, and up from $2 billion in the third quarter last year. The FDIC also reported that the number of institutions with problems continues to rise.

Also, investors will get details of the Federal Open Market Committee's decision to pump a second tranche of liquidity into the markets when minutes from its November meeting will be released. October existing home sales data is due at 10 a.m.

On Tap This Week:

TUESDAY: 5-yr note auction, FOMC minutes.
WEDNESDAY: MBA mortgage apps, durable goods orders, personal income and spending, jobless claims, consumer sentiment, new home sales, oil inventories, 7-yr note auction; Earnings from Deere and Tiffany
THURSDAY: Thanksgiving Holiday — All markets closed
FRIDAY: Black Friday — NYSE early close

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