Crisis weighs on Wall Street

Wall Street was set to fall today, led by banks and resource-related stocks, as risk aversion tied to Europe's debt crisis sent Italy's bond yields back into a perceived danger zone.

Prime minister-designate Mario Monti was meeting with leaders of Italy's biggest two parties to discuss the "many sacrifices" needed to reverse a collapse in market confidence as the yield on Italy's 10-year benchmark bonds leaped above 7 per cent.

European stocks dropped 0.7 per cent, adding to the previous session's drop, and following on weakness in Asian markets overnight. Japan's Nikkei 225 closed down 0.7 per cent.

A silver lining came in the form of stronger-than-expected retail sales in October and a report showing the New York manufacturing sector rose in November, ending five straight months of contraction. Index futures trimmed losses after the data, but the reports were not enough to undo the morning's futures losses entirely.

Doug Roberts, chief investment strategist at Channel Capital Research.com in Shrewsbury, New Jersey, said while the data was "OK but are not resounding," investors would stay focused on Europe.

"It is what I call the elephant in the room," he said. "What people are thinking about more than anything is what could trigger a major recession and dislocation, and that's really Europe."

S&P 500 futures fell 8.9 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures slid 77 points, and Nasdaq 100 futures lost 13.25 points.

Shares of US banks and natural resource-related shares, which are sensitive to flare-ups in Europe's debt crisis, looked set to be among the biggest losers.

In premarket trade, Citigroup fell 1.4 per cent to $27.97, while aluminum producer Alcoa Inc fell 0.9 per cent to $10.29.

When Italian bond yields rose above 7 per cent last week, the S&P 500 fell nearly 4 percent in one day. Heightened volatility has marked US equities trading recently as investors fret about the debt crisis.

Bond prices in other European nations also rose sharply. In France and Austria, yields on their benchmark 10-year bonds both hit 3.6 per cent.

The rise in the yields of countries that were until recently thought to be more isolated from the crisis has created new worries about a wider conflagration in European debt markets and could strain budgets when governments refinance large amounts of debt.

"The danger is - and the markets are keenly aware of this - that this crisis, like most, turn on a dime and can blow up very, very quickly," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.

"As long as the (European Central Bank) continues to be unwilling to become the lender of last resort and really pull out the bazooka you are going to continue to see these scares."

In the latest earnings reports, Wal-Mart Stores's quarterly profit missed expectations as the economy continues to weigh on customers at its US unit, its largest division. Its shares dropped 1.4 per cent to $58.05.

Home Depot Inc raised its fiscal-year outlook for the third time in six months as efforts to improve distribution and boost customer service helped the home improvement chain gain share from archrival Lowe's Cos Home Depot rose 1.2 per cent to $38.70.

Reuters