Debt deal impasse sinks US market

US stocks dropped yesterday as bank shares bore the brunt of investor frustration over governments’ inability to solve debt crises in the United States and Europe.

With five days to go before President Barack Obama’s deadline for a debt ceiling deal and no agreement in sight, Republicans and Democrats were crafting a fallback plan to avert a US default.

The longer the debt ceiling debate remains unresolved, the bigger the risk for further declines in stocks and a spike in volatility. The CBOE Volatility index rose 7.8 per cent yesterday after a gain of more than 20 per cent last week.

Adding to pressure on financials, the Eurozone’s regulatory stress tests for banks were viewed as unrealistically soft, given the scope of the crisis.

“It’s not a good environment for financials,” said Terry Morris, senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania.

“The market is really scared right now and it’s a fragile economy that we have, so when you throw something like this in the cake, then you have investors sitting on the sidelines or selling.”

Bank of America hit a new 52-week low and ended down 2.8 per cent to $9.72 while Citigroup lost 1.7 per cent to $37.74. Financials were the weakest S&P sector yesterday, losing 1.4 per cent.

The Dow Jones industrial average dropped 94.57 points, or 0.76 per cent, to 12,385.16. The Standard & Poor’s 500 Index declined 10.69 points, or 0.81 per cent, to 1,305.45. The Nasdaq Composite Index fell 24.69 points, or 0.89 per cent, to 2,765.11.

Expectations of strong earnings could fuel optimism, but it may not be enough to lift the market from its recent decline. Last week’s encouraging results from Google and JPMorgan Chase & Co were overshadowed by global economic worries that sparked the S&P 500’s worst performance in five weeks.

In the latest earnings news, Halliburton reported a 54 per cent jump in quarterly profit as a US onshore drilling boom showed no sign of cooling off. The stock edged up 4 cents to $53.12.

Second-quarter earnings for S&P 500 companies are seen rising 6.5 per cent, and of the 44 companies in the S&P reporting so far, 75 per cent posted higher-than-expected profits, according to Thomson Reuters Proprietary Research.