Bank failures, safe-haven flows pummel small caps

Small-cap stocks turned a sleepy morning erosion into a full-blown afternoon debacle, as worries about the financial system renewed concerns about any near-term economic recovery and sparked money flow away from equities. The Russell 2000 (NYSE:IWM) closed down 14.23, or 2%, at 696.11.

The trigger for today’s sell-off appeared to be news that FDIC regulators seized two small banks that failed over the weekend, and sold them off to Mutual Omaha Bank. The immediate beneficiary of these systemic financial worries was the Treasury market, with bond and notes lifted by safe-haven flows out of stocks. The yield on the benchmark 10-year note tumbled over 2% as cash 10s rallied.

With nearly one-fourth of the S&P 500 reporting earnings this week, the early-week focus was expected to be squarely on the profit picture, giving the market time to shift into “macro-economic” gear later this week ahead of Friday’s big employment release. However, key earnings numbers were mixed today, and failed to generate enough of a positive story to counter the bank failure news. It should be noted that volume in most financial instruments — stocks, bonds and currencies combined — was light, which suggests some uneven positioning as investors either wait for some of this week’s heavy economic calendar to play out, or as they hold out for more convincing signs of a turn in the earnings news.

Looking ahead to Tuesday’s session, the market gets the first taste of economic data this week, first with the Case Shiller Home Price Index at 9:00 a.m. ET, then from Consumer Confidence data at 10:00. The Case Shiller data is somewhat dated, but the confidence report is for the July time frame.

Crude oil prices were modestly higher throughout the session, which also played into investor concerns about the growth and inflation outlook heading toward all these key economic reports this week. Crude oil futures gained about $1.50 dollars a barrel today, or about 1.2%, pushing close to $125 by the end of the U.S. trading session. Attacks by Nigerian rebels on pipelines lifted energy prices, but concern . . .

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