Stocks reversed an early rise on Wall Street Monday as traders returned to worrying about the European economy.
Optimism about a deal to prevent financial collapse in Cyprus had briefly pushed the Standard & Poor’s 500 index to within a quarter-point of its record closing high, but stocks soon turned negative.
The S&P 500 and Nasdaq composite index both closed down 0.3 percent. The Dow Jones industrial average slipped 0.4 percent.
Stocks turned negative about an hour into the trading day Monday as the initial euphoria about Cyprus‘ deal to secure 10 billion euros in emergency funding was overshadowed by renewed concerns about the European economy.
The fear intensified after a top European official indicated that investors in struggling banks may be forced to take losses — an element of the Cyprus agreement that had previously been seen as unique to that country.
All ten industry groups in the S&P 500 closed lower, with industrial and materials companies posting the biggest losses. Network technology company VMware Inc. dove after the website Business Insider reported that PayPal and eBay will remove its software from 80,000 servers. The stock fell $3.65, or 4.6 percent, to $76.50.
Among the biggest drags on the S&P 500 index were software maker Red Hat Inc., online marketplace eBay Inc. and Textron Inc., an aerospace and defense contractor.
Europe still needs a long-term economic fix, said David Kelly, chief global strategist at J.P. Morgan Funds. Business activity in the 17 nations using the euro has declined continually since September 2011, according to research by Markit, a data provider. The region’s economy shrank 0.6 percent in 2012, according official government statistics.
Business activity in nations that use the euro contracted more quickly in March, according to Markit’s closely-watched survey of purchasing executives, which was published Thursday. The index had its worst decline in four months.
European policy makers have avoided a financial crisis by flooding the market with cash, but they haven’t addressed economic hardship on the ground, Kelly said. In granting Cyprus‘ emergency rescue, for example, lenders demanded economic reforms, debt payments and a banking overhaul that will result in heavy losses for bank bondholders and shareholders. In addition, people with more than 100,000 euros in their accounts will lose up to 40 percent of their deposits.
Kelly said that’s tough to swallow for people facing high unemployment and government cutbacks in Greece, Italy, Spain and other countries that received bailouts.
“If they’re going to end up broke anyway,” Kelly said, it will be “harder and harder for people to make the sacrifices that Europe is demanding of them.” That could lead voters in bailed-out countries to resist lenders’ terms, increasing political and economic instability in Europe and weighing on global markets, he said.
That concern intensified Monday after a key official indicated that the Cyprus rescue may serve as a model in other nations with struggling banks.
“If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders,” said Jeroen Dijsselbloem, who chairs meetings of finance ministers from nations that use the euro, in an interview with the Financial Times and Reuters. Dijsselbloem’s office confirmed the remarks.
Wall Street had opened higher, following gains in Europe and Asia. Traders were relieved that international lenders agreed early Monday to release emergency rescue funds for Cyprus. The European Central Bank will continue to support the nation’s foundering banks. In exchange, Cyprus will take major steps to shrink its troubled banking industry and cut its budget.