NEWS ANALYSIS
A day after President Barack Obama unveiled his job creation plan to Congress on Thursday evening, the Dow Jones Industrial Average fell 303 points, or 2.6 percent, while the S&P 500 Index dropped 31 points, or 2.6 percent. The technology-heavy Nasdaq Composite Index fell by 61 points, or 2.4 percent last Friday.
The declines were the worst single day drop across all major indices in more than three weeks. All 30 components of the Dow were in the red.
Two of the drags on the Dow were McDonald’s Corp. and Bank of America Corp. McDonald’s, usually seen as one of the safest bets during any economic contraction, fell by 4 percent after its August revenues came in shy of expectations.
Layoffs in the Spotlight
Shares of Bank of America, the nation’s largest bank by assets, fell by 3.1 percent after a Wall Street Journal report cited internal discussions that the bank may cut 40,000 jobs—10,000 more than previously thought.
The massive layoffs will come mostly from Bank of America’s far-reaching consumer and retail banking division. The bank is also considering shuttering 10 percent of its bank branches that are less profitable.
Bank of America CEO Brian T. Moynihan has been grappling with how to extract more profit out of the Charlotte, N.C.-based banking giant, but has faced regulatory, legal, and economic challenges during his tenure.
Bank of America’s acquisition of Countrywide Financial in 2008 beset the firm with billions of dollars worth of troubled mortgages, which it is in the painful process of shedding. In addition, the bank is one of 17 lenders recently sued by federal regulators for allegedly selling toxic mortgages to Fannie Mae and Freddie Mac.
Last week, Moynihan let go of two of the bank’s most senior executives in a management shakeup designed to streamline the business during a trend of lower profits across the banking industry.
Trouble at the ECB
Investors were spooked as the European Central Bank (ECB) announced that board member Juergen Stark, from Germany, resigned Friday morning.
The departure of a top official could hardly come at a worse time, and underscores the lack of unity regarding how to act to stem an escalating debt crisis in the eurozone. Stark had been a major proponent of raising interest rates to protect the euro currency.
The euro currency dropped against the dollar, reaching a six and a half month low. German and U.S. government bonds also increased in value as investors sought safer assets amid nervousness over the planned Greek debt swap.
The ECB is the last line of defense and is the sole authority responsible for fiscal policy across the nations that use euro currency. It is also the institution that lent capital to troubled nations in the past to avoid a default on their bonds.
Stark’s departure signals a growing rift between Germany, Europe’s biggest and strongest economy, and the rest of the field on how to deal with a lingering debt crisis. German politicians have resisted the belief that ECB should purchase more government bonds.
The rift could jeopardize ECB’s decisiveness and effectiveness in dealing with pending sovereign debt issues, and puts even greater pressure on ECB President Mario Draghi, who is scheduled to take over the reins from Jean-Claude Trichet in November.
Bonds Rise
Investors snapped up safe assets last week, buying German and Dutch bonds and shedding Greek debt.
Yields on German government bonds (a.k.a. bunds) fell to a new record low, with the 10-year bond yields falling by 24 basis points last week to 1.77 percent, which is a record low, according to financial data from Bloomberg.
In addition, investors also sought Dutch bonds. Yields on 10-year maturity Dutch bonds also fell to 2.2 percent Friday.
The economies of the Netherlands and Germany are considered two of the strongest in the eurozone.
Greece Vows to Avoid Default
Greek Prime Minister George Papandreou last week vowed to go ahead with deep spending cuts and austerity measures, amid more protests across the country.
Papandreou, in an effort to solidify support from ECB officials and leaders of other eurozone nations, dispelled any notions that Greece will default on its debt even as the Mediterranean nation struggled to meet the terms of its last loan.
“We decided to fight the battle to avoid a disaster for the country and its people and to stay in the euro,” Papandreou said in a televised speech in Thessaloniki, Greece, Saturday. Thessaloniki is the nation’s second biggest city.
Roughly 20,000 protesters, mostly union workers, students, and anarchists, took to the Thessaloniki streets in protest of Papandreou and his policies.
In addition, Greek Finance Minister Evangelos Venizelos said Sunday that the country would impose a new two-year property tax law to boost revenues and close its budget gap.
Should Greece chooses to default, it would hit the bottom lines of some of the largest banks in Europe that are the biggest holders of Greek bonds.
