Stocks Open Lower as Investors Fear Rally Was Overdone

By Anna Hirtenstein

U.S. stocks fell Tuesday with investors anxious that the recent rally has gone too far amid gloomy economic forecasts.

The S&P 500 fell 0.4%, on track to break its five-session winning streak. The Dow Jones Industrial Average dropped 195 points, or 0.7%. and the Nasdaq Composite was up less than 0.1%.

Overseas stocks were mainly lower as well. The pan-continental Stoxx Europe 600 slipped 1% after reaching its highest level in nearly a month. Hong Kong's Hang Seng Index edged down 1.4%, and Japan's Nikkei 225 slipped 0.4%.

"Some investors will be taking profit after yesterday's rally," said Sebastien Galy, a macro strategist at Nordea Asset Management. "There's been a real divergence between what the market believes and the reality of the economy."

The Organization for Economic Cooperation and Development said Tuesday that unemployment rates in the world's advanced economies will reach the highest level this year since the Great Depression.

The European Commission released its Summer Forecast report, which downgraded its expectations for the trade bloc's economy. It is now expecting a contraction of 8.3% for 2020, down from its earlier prediction of 7.4%. It also forecast less growth next year than previously thought, indicating a longer downturn.

"Expectations about a V-shaped recovery have taken a hit," said Michael Hewson, a chief markets analyst at brokerage CMC Markets. "This means there's going to be a longer bottom, it's going to take awhile for economic activity to pick back up off the floor. It'll be very stop-start when it comes to trying to recover normal levels of activity."

Data released on German industrial production showed a rebound in activity in May after the country eased its lockdown, but came in below consensus expectations. Activity was still at least 20% below levels seen in February. Germany's DAX stock index traded down 1.2%, among the worst performing gauges in Europe.

It "shows how difficult the return to normality will be," said Carsten Brzeski, chief economist for the eurozone at ING. "After the lifting of the lockdown measures, businesses must have been more reluctant than consumers."

Investors are keeping a close eye on Covid-19 infection rates.

"We are in a situation where the latest news from the U.S., Germany, parts of the U.K. and the Melbourne lockdown in Australia, it just acts as a reminder to investors that not everything is going to proceed on a smooth trajectory," said Peter Dixon, an economist at Commerzbank.

In corporate news, shares of Carnival fell 3.7% after it canceled a series of cruises planned for the fourth quarter of 2020 and beginning of next year due to the coronavirus and resulting delays at shipyards.

In Europe, Bayer declined 6.1% after it hit a snag in the resolution of a lawsuit about a pesticide that allegedly causes health problems such as cancer. The judge handling the case raised concerns on how future claims would be dealt with and Bayer said it would address this at the preliminary approval hearing on July 24.

The yield on 10-year Treasurys edged down to 0.664% from 0.683% on Monday, declining for the second day as some investors sought safety. The WSJ Dollar Index, which measures the dollar against a basket of currencies, rose 0.1%.

Crude oil prices slipped. Brent, the global benchmark, retreated 0.5% to $42.87 a barrel. West Texas Intermediate futures, the U.S. crude gauge, fell 0.8%.

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