Investors set their eyes on Europe and stocks follow global markets lower

Signs of economic weakness around the globe and Europe’s intensifying debt crisis are unnerving investors, who have been piling out of riskier investments like commodities and equities for the perceived safety of higher-rated government bonds.

U.S. banking stocks are heading into a bear market as Europe’s debt crisis pressures the sector. The KBW Bank index , which measures the performance of 24 U.S. banks, is down 16 percent from a peak in March. The index was down 1.2 percent just after the open on Monday.

Morgan Stanley has come under pressure as bond markets treat the bank as a junk-rated company, and the higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade. The bank’s stock is off 40 percent since late March.

“We may well have a snap back rally on the equity side but I don’t think it will be a big one, there is still a lot of caution out there,” said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago.
“All we’ve really done is seen some short covering here in the stock indexes and we are just stable, bonds are still very elevated.”

With little on the economic or corporate calendar Monday, investors are taking most of their cues from any comments out of Europe.

”Europe is front and center, back, left and right,” said Dan Greenhaus, chief global strategist at BTIG.

Germany’s DAX lost 0.9% to 5,993 and Switzerland’s SMI shed 0.6% to 5,741, though France’s CAC-40 managed to rise 0.5% to 2,968.49. Markets in Britain were closed for a holiday.

Peter Cardillo, chief market economist at Rockwell Global Capital in New York said he was watching 1,275 as a support level on the S&P 500 after the index broke through its 200-day moving average on Friday following the worst decline for the index in 7 months.

“If we close under that tonight, then the market is headed lower in the short-term, possibly by 3 or 4 percent,” he said.

In a potential boost for markets looking for measures to end the debt crisis, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro-area finances, and major new powers for the European Commission, European Parliament and European Court of Justice.

Three leading Portuguese banks said on Monday they would draw on funds provided under the country’s 78 billion-euro ($96-billion) international bailout to meet tough new capital requirements as they struggle with the country’s debt crisis.

Stock trends

Investors sold shares in Asia as well, including stock in Sony, which fell below 1,000 yen for the first time since 1980 — the year after it introduced the iconic Walkman portable cassette player.

Japan’s Nikkei 224 index dropped 1.7% to close at 8,295.63, its lowest finish since Nov. 28, 2011. The broader Topix index ended below the 700 mark for the first time since December 1983, Kyodo News Agency said.

Japan’s shares fell sharply on Monday, with the broader Topix index hitting a 28-year low as investors reacted to the disappointing Friday U.S. jobs data.

“While we are not down 20 percent and in official bear market territory, we believe that we have entered a bear market,” wrote Wayne Kaufman, chief market analyst at John Thomas Financial in a note on Monday.
“Equities have not responded to oversold conditions or to very attractive valuations versus bonds, and we must take that as a warning,” he said.

There are also worries about slowing growth in emerging markets such as China and India. Recent reports out of China last week showed the manufacturing sector contracted more than expected in May.

The S&P 500 (SPX) lost 3 points, or 0.1%. The Nasdaq (COMP) moved down 3 points, or 0.1%. The Dow Jones industrial average (INDU) dropped 24 points, or 0.2%.

Facebook IPO aftermath

Companies: Shares of Facebook (FB), which have gotten hammered since the company’s IPO, edged slightly lower.

Groupon (GRPN) shares added 0.6% after dropping sharply Friday. The online discount service, which has been dogged with questions about its accounting practices since its initial public offering in November, ended its lock-up period Friday, meaning that insiders who own shares are now able to sell them.