U.S. Stock Indexes Fall With Cyprus In Mind

U.S. stock indexes finished mixed on Tuesday, with the S&P 500 extending its longest losing streak since late December, as investors considered developments in Cyprus that placed a financial bailout at risk.

“We would legitimately expect brushfires to emerge out of Europe on occasion in 2013; the difference this year is we wouldn’t expect prolonged crisis,” said Jim Russell, senior equity strategist for U.S. Bank Wealth Management.

The Dow Jones Industrial Average fell as much as 69 points and climbed up to 62, and ended up 3.76 points at 14,455.82, with Caterpillar Inc.  pacing losses that included 14 of its 30 components.

Down for a third session, its longest losing run this year, the S&P 500    shed 3.76 points, or 0.2%, to 1,548.34, with energy the worst performing and consumer staples the best of the 10 major sectors.

The Nasdaq Composite index  fell 8.5 points, or 0.3%, to 3,229.09.

For every two stocks rising, three fell on the New York Stock Exchange, where 731 million shares traded.

Composite volume surpassed 3.7 billion

Reports about a controversial rescue plan in Cyprus, where banks are closed until Thursday, dominated much of the choppy trading session. Follow streaming coverage of Cyprus bank bailout.

The plan, required by international lenders under the terms of a roughly $13 billion bailout, would place a one-time tax on depositors. The parliament in Cyprus Tuesday rejected an updated proposal, which avoided taxing the smallest depositors but still slapped a 6.75% tax on those with over 20,000 euros ($26,000) on deposit. Large depositors, or those with over 100,000 euros, faced a 9.9% tax rate.

“This does smack of breaking some sort of emotional pact that depositors have with their banking system, if overnight they can swoop in and swipe deposits in the name of needing tax revenue. You’ve just changed the terms of the deal. And the last thing the European banking system needs is a flight of trust,” said Russell.

While the situation in Cyprus was considered fairly unique — its tax policy has encouraged a large volume of deposits from wealthy Russians — the prospect that future European bank bailouts could entail some tax on depositors shook markets Monday and concerns about the situation spilled into Tuesday trading.

Stocks recovered much of their losses near the close after Bloomberg News reported the European Central Bank would provide liquidity to Cyprus, as needed, within the existing rules.

Simple profit-taking was also likely at play as indexes sold off for much of the session.

“The market was poised for a breather. We’ve been awfully strong on a year-to-date basis,” he added, referring to the 8.6% rise by the S&P 500 index.

That gain, which had the Dow Jones Industrial Average   rising to a record close last week, is attributed by many, including Russell, to the ongoing bond purchases by the Federal Reserve, which on Wednesday concludes a two-day policy-setting session.

“At some point the Fed is going to take its foot off the accelerator, and we may get a preview tomorrow. But we think it will be at the next meeting that comes into sharper focus,” Russell said.

Fed ahead

The Federal Open Market Committee on Tuesday started a two-day gathering after agreeing in December to tie record-low interest rates to the labor market and inflation.

“Don’t expect the Fed to introduce any changes, they’ll keep their current programs in place, and there won’t be any indication of when they are going to start withdrawing quantitative easing,” said Gus Faucher, senior economist at PNC Financial Group.

“There’s a little concern, but the general consensus is Cyprus is not going to be a major factor for the U.S. economy going forward,” he added.

Ahead of the open, the Commerce Department reported builders broke ground on 917,000 homes on an annualized basis, with housing starts up 0.8% in February, slightly better than expected.

“The housing market recovery continues,” said PNC’s Faucher.