Bloomberg News

U.S. Stocks Fall as Concern About Europe Debt Crisis Intensifies

June 25, 2011

June 25 (Bloomberg) -- U.S. stocks fell this week, giving the Standard & Poor 500 Index its seventh loss in eight weeks, amid concern the European debt crisis isn’t contained.

JPMorgan Chase & Co. and Bank of America Corp. fell at least 1.5 percent after European Central Bank President Jean- Claude Trichet said June 22 the turmoil threatens to infect banks. Micron Technology Inc. sank 7.9 percent, the most in the S&P 500, after reporting revenue and profit that missed analysts’ projections. Red Hat Inc., the largest seller of the Linux operating system, jumped 9.3 percent after beating estimates with its earnings forecast.

The S&P 500 fell 0.2 percent to 1,268.45, and dropped three straight days to end the week. The measure has slumped 7 percent since April 29. The Dow Jones Industrial Average retreated 69.78 points, or 0.6 percent, to 11,934.58 this week.

“Everybody is trying to digest how the European debt situation is going to shake out,” said Jason Pride, director of investment strategy at Glenmede in Philadelphia, which manages about $20 billion. “They’re playing an expensive game of chicken with Greece because the downside of not passing a bailout for that country is effectively a financial system meltdown.”

Equities fell after Moody’s Investors Service said on June 23 it may downgrade 13 Italian lenders because they would be vulnerable to a cut in the government’s credit rating. Bond yields rose in Spain and Italy. Trichet said risk signals for financial stability in the euro area are flashing “red” as the debt crisis in nations such as Greece threatens to infect banks around the region.

‘It Is Red’

“On a personal basis I would say ‘yes, it is red’,” Trichet said June 22 in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. “The message of the board is that” the link between debt problems and banks “is the most serious threat to financial stability in the European Union.”

The S&P 500 has dropped since climbing to an almost three- year high on April 29 amid concern about Europe’s sovereign debt crisis and weaker-than-estimated economic data. The benchmark gauge for U.S. stocks has risen 0.9 percent this year.

The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, fell 3.4 percent to 21.10, paring three consecutive weeks of gains.

U.S. equities rose the most since April on June 21 amid investor optimism that a vote of confidence in Greek Prime Minister George Papandreou is likely to determine how soon the nation can win international aid to shore up its finances. Yesterday, European Union leaders pledged to support Greece if the nation approves austerity measures.

U.S. Data

Federal Reserve officials lowered their forecasts on June 22 for growth and employment in 2011 and 2012, projecting the economy will expand 2.7 percent to 2.9 percent this year, down from the projection of 3.1 percent to 3.3 percent in April. U.S. central bankers said inflation, excluding food and energy, will be somewhat higher than previously forecast. They said the pace of recovery is likely to “pick up over coming quarters.”

Purchases of new U.S. houses fell in May for the first time in three months, showing the industry is struggling to gain momentum. Sales dropped 2.1 percent to a 319,000 annual pace last month, figures from the Commerce Department showed June 23.

Banks Decline

The KBW Bank Index, which tracks 24 companies, declined 2.4 percent this week. JPMorgan, the second-biggest U.S. bank by assets, fell 3.2 percent to $39.49. Bank of America, the biggest U.S. lender by assets, dropped 1.5 percent to $10.52.

Micron tumbled 7.9 percent to $7.21 as the biggest U.S. maker of computer-memory chips reported revenue and profit that fell short of analysts’ projections.

The price of dynamic random access memory, or DRAM, for personal computers dropped as supplies increased and demand from makers of consumer laptops and desktop PCs remained sluggish, the company said. Orders are also slowing for chips used in inexpensive mobile phones, pushing down prices, Micron Chief Executive Officer Steve Appleton said.

Walgreen Co. slumped 7.3 percent to $41.39, helping send the S&P 500 Consumer Staples Index down 1.7 percent, the most among 10 groups. The largest U.S. drugstore chain said it failed to renew a contract worth more than $5 billion in annual sales with drug-benefits manager Express Scripts Inc. after negotiations fell apart. The agreement will end as of Jan. 1.

P&G Retreats

Procter & Gamble Co., the world’s largest consumer-products company, fell 3.3 percent to $62.59 for the second-biggest retreat in the Dow average.

Boeing Co. dropped the most in the Dow, slipping 3.9 percent to $71.26. AMR Corp.’s American Airlines is in talks with Airbus SAS about buying at least 100 narrow-body planes, a possible break from its longtime reliance on Boeing jets, two people familiar with the matter said.

Energy companies in the S&P 500 dropped 1.4 percent as a group, the second-biggest weekly loss, as crude oil for August delivery fell to $91.16 a barrel in New York after the International Energy Agency on June 23 announced the release of 60 million barrels. Exxon Mobil Corp., the world’s largest energy company by market value, retreated 2.8 percent to $76.78. Chevron Corp., the second-largest U.S. oil company, declined 1.3 percent to $97.90.

Red Hat jumped 9.3 percent to $45.03, the most in the S&P 500, after it said profit for fiscal year 2012 will be as much as $1 a share, beating the average analyst estimate of 96 cents a share from a Bloomberg survey.

CarMax Climbs

CarMax Inc., the largest U.S. seller of used cars, climbed 9.2 percent to $31.93 after saying first-quarter sales of used cars increased 7.5 percent to 108,511 from the same period a year earlier. Net income rose 25 percent to 55 cents a share, compared with the average profit forecast of 47 cents a share in a Bloomberg survey of 13 analysts.

The S&P 500 Materials Index, which tracks 30 companies, rose 2.4 percent, the most among 10 groups. Chemical maker DuPont Co. jumped 4.8 percent to $51.96, while Caterpillar Inc., the world’s largest maker of construction equipment, increased 4.2 percent to $100.01, and Alcoa Inc., the largest U.S. aluminum producer, added 3.5 percent to $15.23.

--Editors: Nick Baker, Joanna Ossinger

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Cecile Vannucci in New York at cvannucci1@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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