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Hopes for the start of a bullish Santa Claus rally were shattered on Monday as renewed jitters about the prospects for financial stocks like Bank of America sent the Dow careening 100 points lower and the Nasdaq Composite slumping 1.3%.
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The Dow Jones Industrial Average fell 100.13 points, or 0.84%, to 11766.26, the Standard & Poor's 500 lost 14.31 points, or 1.17%, to 1205.35 and the Nasdaq Composite sank 32.19 points, or 1.26%, to 2523.14.
Without any major economic reports on the agenda, U.S. markets were focused on the ugly selloff in the financial sector and a number of global events, including the death of North Korean leader Kim Jong Il.
Typically investors can look forward to a Santa Claus rally during the last two weeks of December thanks to low trading volumes ahead of the holiday and maneuvering by portfolio managers before year end. However, Monday's losses leave the Dow in the red for the fifth time in the last six sessions and add to last week's 2.6% tumble.
“The only thing that Santa has for the market is a couple of lumps of coal. There’s still hope there will be something nicer when he gets down the chimney on Sunday,” said Michael James, managing director of equity trading at Wedbush Securities. “I think as the financials have continued to tick lower, that’s all been weighing on the psyche of the market. The path of least resistance has been down.”
By the time the markets closed, the financial sector was off 2.3%, weighed down by the biggest banks. The selloff comes after The Wall Street Journal reported that the Federal Reserve is expected to embrace the new Basel III requirements for big banks to hold extra capital as a cushion against losses.
The news is “is a negative for the banks, especially short term because they would have to raise capital,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald..
The markets pressured shares of the banks mentioned as potentially needing to hold this extra capital: JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS).
In another negative development, BofA’s stock plunged below $5 for the first time since March 2009 when the stock market bounced off multiyear lows. BofA trading below $5 is troubling because some fund managers will be forced to sell at that level.
At the same time, the sector was hurt by Nomura analysts, who slashed their earnings estimates on a number of stocks, including Citi, Morgan and Goldman due to the tough trading environment and investment-banking trends.
“There’s interbank lending risk, there is risk with the European sovereigns. Stability and certainty are key, especially in the financial world. If you don’t know where rates are or if there’s a bailout coming, then you don’t have any confidence in the financials,” said Pado.
Meanwhile, concerns about the European sovereign debt crisis continued to crop up. The euro fell to session lows on a Dow Jones Newswires report that eurozone financial ministers have failed to agree to raise the 500 billion ceiling on a bailout fund, but that notion was previously rejected by Germany last week.
European Central Bank President Mario Draghi continues to resist pressure to step up bond buying in an effort to ease the sovereign debt crisis. In an interview with the Financial Times, Draghi said, “People have to accept that we have to, and always will, act in accordance with our mandate and within our legal foundations."
As U.S. stocks closed, the euro was off 0.36% to $1.2996.
Asian stocks suffered steep selloffs in the wake of the death of Kim Jong Il, who died over the weekend. While Il was a global pariah and a threat to the U.S. and its allies, investors may be fearing his death and the transition of power to his son will cause new uncertainty and political instability. South Korea and Japan, two of North Korea's main enemies, put their militaries on alert, while the White House said it is monitoring the situation.
The Kospi Composite, which is South Korea's main stock market, plunged as much as 4.4% before settling down 3.4% at a four-week low. Likewise, markets in Japan and Hong Kong closed sharply lower.
In the commodities market, crude oil fell 35 cents a barrel, or 0.37%, to $93.88. Gold declined $1.20 a troy ounce, or 0.08%, to $1,594.40.
Winn-Dixie (NASDAQ:WINN) reached a $530 million deal to be sold to fellow Southeastern supermarket owner BI-LO. The deal is worth $9.50 a share, representing a lofty 75% premium on Winn-Dixie’s Friday close.
AT&T's (NYSE:T) efforts to sell T-Mobile assets to placate regulators have gone cold, casting further doubt on the $39 billion deal, the Journal reported. Alternatives to a full-blown merger such as a joint venture to share network technology or a minority stake appear more likely, the paper reported.
Xilinx (NASDAQ:XLNX) slashed its fiscal third-quarter sales guidance, projecting a 9% to 12% drop due to a decline in large customer business. Previously, the company projected a reduction of 3% to 8%.
The British FTSE 100 fell 0.41% to 5364.99, France’s CAC 40 gained 0.06% to 2974.20 and Germany’s DAX lost 0.54% to 5670.71.
In Asia, Japan’s Nikkei 225 slumped 1.26% to 8296.12, while Hong Kong’s Hang Seng declined 1.18% to 18070.20.