Bloomberg News

Stocks Drop on Economy Concern as Euro Falls; Oil Slumps on IEA

June 23, 2011

June 23 (Bloomberg) -- Global stocks slid for a second day and the euro weakened as U.S. jobless claims rose and European Central Bank President Jean-Claude Trichet said the debt crisis threatens banks. Oil fell as the International Energy Agency planned to release emergency stockpiles.

The MSCI All-Country World Index dropped 1.2 percent at 4 p.m. in New York, trimming a decline of as much as 2.2 percent, and the Standard & Poor’s 500 Index fell 0.3 percent. Crude dipped to a four-month low and gold plunged the most in seven weeks. The euro lost 0.7 percent to $1.4260. Gains in Treasuries sent the 10-year yield down six basis points to 2.92 percent, while Portuguese, Greek and Irish yields jumped and costs to insure European sovereign debt from default surged to a record.

Equities and the euro pared their losses in the final hour of regular U.S. trading amid reports Greece reached an agreement with the European Union and International Monetary Fund on an austerity plan that would help it win more financial aid. Risk signals for financial stability in the euro area are flashing “red,” Trichet said yesterday in Frankfurt.

“Everything continues to revolve around the Greek situation and getting them through this crisis,” said Peter Jankovskis, who helps manage about $2.7 billion at Oakbrook Investments in Lisle, Illinois. “If we can get some visibility on that, the U.S. stock market will have room for a rebound. Otherwise, it will still be an overhang.”

Jobless Benefits

Stocks fell early on Trichet’s remarks and as U.S. Labor Department figures showed applications for jobless benefits increased 9,000 in the week ended June 18 to 429,000. The S&P 500 was down as much as 1.9 percent. It erased much of that on afternoon reports of the austerity agreement with Greece.

Measures proposed by Greek Finance Minister Evangelos Venizelos to complete a 78 billion-euro ($111 billion) austerity package required to win a bailout were endorsed by officials from the EU and IMF, said a person familiar with the matter. Greek lawmakers must approve the measures in a vote next week, a condition for receiving a fifth loan payment under an existing EU-led bailout and for future financing. Failure to secure aid would push Greece to the brink of default.

The S&P 500 pared losses after approaching its average price over the last 200 days of about 1,262, a level monitored by investors whose decisions are influenced by chart patterns. A decline below the 200-day moving average could have heralded more losses, according to Schaeffer’s Investment Research and other analysts.

Reduced Forecasts

U.S. stocks broke a four-day rally yesterday as the Federal Reserve reduced projections for U.S. economic growth. The S&P 500 is down 5.9 percent from an almost three-year high at the end of April. For the year, the index is up 2.1 percent.

Fed Chairman Ben S. Bernanke said yesterday the recovery is progressing “more slowly” than expected as policy makers confirmed plans to complete a $600 billion bond-purchase program this month. Central bankers cut forecasts for economic growth to 2.7 percent to 2.9 percent for this year, down from April’s forecasts of 3.1 percent to 3.3 percent, based on the median range of projections. Growth in 2012 will range from 3.3 percent to 3.7 percent, compared with forecasts of 3.5 percent to 4.2 percent in April, the Fed said.

Stocks in the U.S. and Europe may drop as much as 11 percent over the next 12 months as growth slows and earnings weaken, according to equity strategists at Exane BNP Paribas.

“Earnings and interest rates, two key drivers for equities, are as good as they are likely to get,” Bert Jansen, a stock strategist at Exane in Paris, wrote in the report. “With bond yields, interest rates and inflation near record lows and profit margins close to record highs, it is difficult to see what will drive equity markets higher beyond 2011, amid slowing growth.”

Broad Decline

Energy, raw-material and financial companies led losses in global stocks. Eight of 10 main industry groups in the S&P 500 retreated as three stocks fell for every two that rose on U.S. exchanges. About 8.3 billion shares changed hands on U.S. exchanges, 17 percent more than the three-month average. Chevron Corp. and Exxon Mobil Corp. slid more than 1.6 percent to help lead losses in 20 of 30 stocks in the Dow Jones Industrial Average.

Aflac Inc., the largest seller of supplemental health insurance, fell 0.7 percent after saying it may issue as much as 100 billion yen ($1.24 billion) in debt as it records losses tied to investments in banks from Greece, Ireland and Portugal. The second-quarter losses on the assets will probably be about $610 million, the insurer said today.

Sinking Oil

Oil for August delivery in New York sank 4.6 percent to $91.02 a barrel, the lowest settlement since Feb. 18. The S&P GSCI index of commodities dropped as much as 4.7 percent, the most since May 5. Energy products accounted for the three biggest losses among the 24 materials tracked by the index.

The IEA announced that it will release 60 million barrels of oil from emergency stockpiles to alleviate possible shortages following the loss of Libyan crude. It is the third time the Paris-based agency has coordinated the use of emergency stockpiles since the agency was founded in 1974. Half of the 60 million barrels of crude from the IEA release will come from the U.S. Strategic Petroleum Reserve, according to the IEA and the U.S. Energy Department.

Gold Declines

Gold futures plunged 2.1 percent to $1,520, after yesterday reaching the highest level since touching a record on May 2. The slowing economy and rising dollar erode the appeal of commodities as an investment and ease the risk of accelerating inflation.

The Stoxx Europe 600 Index declined 1.4 percent, with almost 23 shares slipping for each that gained. European services and manufacturing growth slowed more than economists forecast in June, a report by London-based Markit Economics showed today.

Bayer AG plunged 6.3 percent as a rival to its Xarelto blood thinner prevented more strokes with less major bleeding than an older medicine in a study. Mediaset SpA, the broadcaster controlled by Italian Prime Minister Silvio Berlusconi, sank 6.7 percent after forecasting that advertising will decline.

The euro slid against 15 of its 16 major currencies monitored by Bloomberg, depreciating 0.3 percent versus the yen. The Dollar Index, which tracks the U.S. currency against those of six trading partners, climbed 0.7 percent as the U.S. currency strengthened against all 16 major peers except the Swiss franc. The pound weakened 0.4 percent to $1.6006 after earlier falling below $1.60 for the first time since April 1.

Greek Yields

The yield on the Greek two-year note jumped 76 basis points to 28.64 percent, climbing for the second consecutive day. European ministers meet in Brussels today and tomorrow to debate the size of new loans to Greece and how to get holders of the nation’s debt to contribute.

The Markit iTraxx SovX Western Europe Index of default swaps on 15 governments jumped 18 basis points to 241.7. Default swaps on Greece rose 89 basis points to 2,282.075, according to CMA as of the close in London, near an all-time high reached on June 20. Portugal’s swaps climbed 38 basis points to 821.6 and contracts on Spain rose 22 to 303, while those for Ireland increased 40 basis points to 795 and Italy’s were 18 basis points higher at 197.

The MSCI Emerging Markets Index of stocks fell 0.9 percent, its first decline in three days. Russia’s Micex Index slipped 2 percent, South Africa’s benchmark gauge lost 1.5 percent and South Korea’s Kospi Index and Brazil’s Bovespa slipped 0.4 percent.

--With assistance from Claudia Carpenter, Adam Haigh, Andrew Rummer, Michael Shanahan, Daniel Tilles and Jason Webb in London and Maria Petrakis in Athens. Editors: Jeff Sutherland, Michael Regan

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


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