Stocks Tumble, Euro Weakens on Debt Concern; Bond Risk Jumps
May 23, 2011, 4:54 PM EDTBy Stephen Kirkland and Rita Nazareth
May 23 (Bloomberg) -- Global stocks sank the most in two months, while the euro touched an all-time low versus the Swiss franc and commodities plunged, amid signs Europe’s government- debt crisis is worsening and the economic recovery is slowing. Costs to protect Greek debt from default surged to a record.
The MSCI All-Country World Index sank 1.8 percent at 4:30 p.m. in New York. The Standard & Poor’s 500 Index retreated 1.2 percent and Italy’s FTSE MIB Index slid 3.3 percent. Ten-year bond yields reached euro-era records in Greece and Ireland and climbed in Portugal, Spain and Italy. The euro fell below $1.40 for the first time since March as the dollar strengthened versus all 16 major peers. Oil and copper lost at least 2.4 percent.
U.S. equities followed European shares lower after Italy’s credit-rating outlook was cut by S&P on May 20 and Spanish Prime Minister Jose Luis Rodriguez Zapatero’s Socialist party suffered losses in local elections amid a backlash over austerity measures. A Federal Reserve Bank of Chicago economic gauge unexpectedly dropped below zero, European services and manufacturing growth slowed more than forecast and a report showed China’s manufacturing may expand at a slower pace.
“There’s bad news out there,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. “We’ve got doubts about European fiscal austerity and weaker economic data across the board. The thing that has driven the market higher -- earnings season -- just came to an end. People will be pulling money out of riskier assets.”
Three-Week Slump
The S&P 500 slid to the lowest level since April 19 after dropping three straight weeks, the longest slump since August. Technology companies and energy producers led declines today among the index’s 10 main industries, all of which fell. Caterpillar Inc., DuPont Co. and Alcoa Inc. slumped at least 1.7 percent to lead declines in 29 of 30 stocks in the Dow Jones Industrial Average.
The Chicago Fed national index, which draws on 85 economic indicators, was minus 0.45 in April versus 0.32 in March. A reading of less than zero indicates below-trend growth in the national economy and a sign of easing inflation pressures.
The S&P 500 has retreated after climbing to an almost three-year high at the end of April. It has slumped 3.4 percent since then as economic data trailed forecasts and investors prepared for the Federal Reserve to complete its $600 billion bond-purchase program at the end of June.
Citigroup Inc.’s U.S. Economic Surprise Index, which gauges the rate at which data are exceeding or missing estimates and, turned negative in May and is at its lowest level since August. The index, which reached its all-time high in March, has risen only one day this month.
Earnings Season
The S&P 500 has still advanced 4.8 percent in 2011 amid higher-than-estimated profits. Per-share earnings topped analysts’ projections at 72 percent of the 455 companies in the index that released results since April 11, data compiled by Bloomberg show.
The yield on the 10-year U.S. Treasury declined two basis points to 3.13 percent today, while the two-year note yield increased one basis point to 0.52 percent after touching 0.4950, the lowest this year.
The Dollar Index, which tracks the U.S. currency against those of six trading partners, climbed 0.9 percent as the greenback strengthened versus all 16 major peers. The yen appreciated against all 16 most-traded counterparts except the U.S. and Canadian dollar. The Norwegian krone, Swedish krona and Australian dollar weakened against most of their peers.
European Stocks
The Stoxx Europe 600 Index slid 1.7 percent, the most since March 15, as all 19 industry groups declined. Ryanair Holding Plc tumbled 5.3 percent after Europe’s biggest discount airline said it will cut capacity for the first time in its history amid higher fuel costs. International Consolidated Airlines Group, the parent of British Airways, sank 5.1 percent and Air France- KLM Group slid 4.5 percent as Iceland’s weather office said ash from a volcanic eruption may reach the U.K. this week, threatening trans-Atlantic traffic.
Italy’s 10-year bond yield climbed three basis points to 4.81 percent, sending the spread with benchmark German bunds eight points wider to 179 basis points, the most since January. The Spanish-bund spread increased seven basis points to 250. The yield on the 10-year Greek security climbed 44 basis points to 16.81 percent. The Irish yield rose to 10.86 percent.
Default Risk
The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose by 12.5 basis points to 202.3 basis points, the highest in more than four months. Credit-default swaps on Greece soared 130.1 basis points to a record 1,476.7, according to data provider CMA. Ireland jumped 30.7 to 671.2, Portugal gained 40.7 to 680.2, while Italy increased 8.8 to 169.6 and Spain climbed 9 to 270.9, CMA data show.
The euro depreciated as much as 0.8 percent to a record low of 1.23235 Swiss francs, before paring its retreat to 0.1 percent.
European Central Bank Governing Council member Ewald Nowotny said the bank will accept Greek government bonds as collateral in its refinancing operations as long as the country maintains its consolidation program. ECB Council member Jens Weidmann said May 20 that the central bank may no longer be able to accept Greek bonds as collateral.
More than a year after European policy makers approved a 750 billion-euro ($1.1 trillion) bailout blueprint to stem the sovereign crisis, bond yields in debt-laden peripheral countries linger near record highs and officials are floating plans to extend Greek repayments. Hours before the May 20 S&P warning about Italy, Fitch Ratings cut Greece three levels and said it would consider an extension of maturities as a default.
‘Decidedly Fearful’
“The week is starting in a decidedly fearful mode,” Kit Juckes, head of foreign-exchange strategy at Societe Generale SA in London, wrote in a report today. The change of outlook on Italy also “amplifies the risk for contagion,” he said.
Fitch Ratings revised Belgium’s rating outlook to negative from stable and affirmed its long-term foreign and local currency user default ratings at AA+. Fitch joined S&P in saying that political deadlock complicates efforts to cut the euro area’s third-highest debt load.
The MSCI BRIC Index of the four biggest emerging markets lost 2.1 percent, extending its retreat from this year’s high on April 8 to more than 10 percent, the threshold that some analysts call a “correction.”
The Shanghai Composite tumbled the most four months after a preliminary purchasing managers’ index compiled by HSBC Holdings Plc and Markit Economics dropped to 51.1 in May from a final reading of 51.8 in April. India’s Bombay Stock Exchange Sensitive Index slid 1.8 percent after Finance Minister Pranab Mukherjee signaled concern about inflation. The Micex Index fell 1.9 percent after OAO Gazprom, Russia’s gas-export monopoly, was cut to “underperform” by Credit Suisse Group AG.
Copper for July delivery dropped 3.2 percent to $3.9915 a pound and crude oil declined 2.4 percent to $97.70 a barrel. The S&P GSCI index of 24 commodities retreated 1.7 percent, the biggest slump since May 11.
--With assistance from Mary Childs in New York, Claudia Carpenter, Michael Patterson, Andrew Rummer, Michael Shanahan and Dan Tilles in London. Editors: Michael P. Regan, Nick Baker
To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
