Europe’s debt crisis could again eclipse most other market factors Tuesday as traders count down to the European leaders summit later in the week.
Fears that the European debt crisis will continue to drain strength from the global economy and concern the EU leaders will make little progress this week weighed on stocks and oil but pushed gold and the dollar higher Monday.
“I still think they have to come up with something material at the summit,” said Boris Schlossberg, managing director of FX Strategy at BK Asset Management. “Nobody expects them to do something about euro bonds. I think it’s pretty much off the table. But some sort of pan-European banking system that would guarantee deposits is definitely necessary. Otherwise, they’re facing this chronic risk of bank runs. I think they understand they just can’t let things be.”
The Dow sank 138 points to 12,502, and the S&P 500 fell 21 to 1313, while the Nasdaq lost 56 points to 2836. Tech was the worst S&P sector, losing 2.2 percent, followed by financials, down 2.1 percent. Energy stocks were down 1.9 percent, as oil futures on Nymex ended down 55 cents at $79.21 a barrel.
Natural gas rose 2.6 percent, finishing at $2.694 per million BTU as Tropical Storm Debby forced the shut in of some oil and gas production in the Gulf. Corn was nearly 7 percent higher, and other grains also rose, as rising temperatures in the Midwest threatened crops.
But traders spent the day watching Europe, particularly after the Supreme Court did not release its ruling on the health-care legislation. That ruling is now expected Thursday.
There were a series of events in Europe that got attention Monday. Spain officially requested aid for its banks, but details were sparse. Greece, which delayed its Monday meeting with IMF and European officials on its bailout, announced that its finance minister resigned. He had been hospitalized with an illness.
But what had traders grumbling were comments from German Chancellor Angela Merkel, including that a common debt would be “economically wrong and counterproductive.” Leaders will discuss a banking union at their two day meeting, starting Thursday. Germany has previously opposed a common bond, supported by France, Italy and Spain.
“My reading of this is she’s really caught in a bind,” said Milton Ezrati, economist and market strategist at Lord Abbett. “All of Europe wants the Germans to pay for everything with no conditions. She has to set conditions. I think in the end she knows she has to pay. She just wants to get the bigger bang for the buck and protect the German taxpayer. She’s playing hardball. Ultimately the Germans are going to make concessions, but they’re not going to be the concessions that are demanded. I think they’re going to ease the austerity conditions.”
On Tuesday, traders will be watching a Spanish bill auction of three to four billion euros in three- and six-month bills.
“It’s very short term so it’s not a pivotal auction, but it’s the only test we have of the markets,” said Ezrati. “There’s always the secondary market, but the auctions always would be a better notion.”
“If that goes not as badly as people fear then it could give the market a lift. It doesn’t have to be good, just as long as it’s not as bad as people fear,” he said.
Ezrati said the markets are looking for something that could generate confidence in the European effort. “It’s been a series of failures,” he said.
“Europe holds all the cards. If they can agree to something or at least appear to agree to something, at least they make headway. I think the wild card here is the European Central Bank,” he said.
Ezrati said the ECB could step in again and make sovereign debt purchases. “That to me would relieve the market tremendously. Short of that, they (leaders) have to agree, but I think that’s a bad bet in the short term.”
There are also U.S. economic reports on Tuesday, including S&P/Case-Shiller home prices at 9 a.m. and consumer confidence at 10 a.m. The Richmond Fed survey is released at 10 a.m., and it’s being watched because of the disappointment with the Philadelphia Fed survey last week.
The U.S. Treasury auctions $35 billion in two-year notes at 1 p.m.