Bloomberg News

Nothing Works in June as Greece Sends Stocks, Bonds Lower

July 01, 2011

(Updates prices in fifth, sixth paragraphs.)

July 1 (Bloomberg) -- Stocks, bonds and commodities posted monthly declines for the first time since the end of the financial crisis in February 2009, dragged down by concern Greece will default and signs economies are slowing.

The MSCI All-Country World Index of shares in 45 countries dropped 1.5 percent in June, including dividends, spurring the first quarterly loss in a year. Bank of America Merrill Lynch’s Global Broad Market Corporate Index slumped 0.65 percent, while the firm’s benchmark gauge of U.S. Treasuries fell 0.31 percent. The Standard & Poor’s GSCI Total Return Index of 24 commodities declined 5.3 percent, also prompting the first three-month slump since the period ended June 30, 2010.

While Greece’s approval of budget cuts and tax increases this week required to win bailout funds drove the biggest four- day rally in the MSCI index since December, it failed to erase June’s equity losses. Riskier assets fell last month as U.S. economic reports missed projections by the most since January 2009, according to data compiled by New York-based Citigroup Inc. using Bloomberg surveys.

“Investors were on the edge,” said David Goerz, the San Francisco-based chief investment officer at Highmark Capital Management Inc., which oversees $17.2 billion. “The No. 1 thing that the market focused on was the slowdown in economic activity. The sovereign debt crisis also got people worried. We’re probably not at the end of it yet, but we got some temporary solution to the Greek crisis.”

Quarter, Year

Commodities led declines today after China’s Purchasing Managers’ Index, a gauge of the nation’s manufacturing, dropped to the lowest level since February 2009. The MSCI All-Country World Index and Treasuries were little changed.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against currencies from six major U.S. trading partners, dropped 0.3 percent to 74.404 in June. The U.S. currency slumped in the final four days, erasing a monthly gain as the euro rallied against most major currencies. The Dollar Index rose 0.25 percent at 8:57 a.m. in New York today.

Equities and raw materials slid in June after rallying since the first quarter of 2009. The S&P commodity index climbed as much as 85 percent from Feb. 18, 2009, peaking on April 8. It retreated 1.4 percent today.

The MSCI gauge gained 119 percent between March 9, 2009, and May 2, according to data compiled by Bloomberg. The global economy may grow 4.3 percent this year and 4.5 percent in 2012, the Washington-based International Monetary Fund said June 17.

Austerity Plan

Bonds did best during the second quarter, with Treasuries returning 2.4 percent and the Bank of America corporate-debt measure rising 1.9 percent. The MSCI equity index gained 0.4 percent, and the S&P commodities gauge sank 7.9 percent. Stocks won in the first half, advancing 5 percent as commodities rose 2.7 percent and both bond measures returned 2.5 percent.

Financial markets were whipsawed in June as Greek Prime Minister George Papandreou fought a legislative battle for the austerity plan and withstood a confidence vote, staving off default. He won parliamentary approval to implement a 85 billion-euro ($124 billion) package that was a condition of receiving further EU aid.

As much as $4.1 trillion was erased from global equities since May 1, when values reached an almost three-year high of $56.1 trillion. Equities fell as data showed confidence among U.S. consumers diminished, China reported a smaller-than- estimated trade surplus and U.K. manufacturing growth declined more than economists forecast.

Paring Declines

The U.S. benchmark measure retreated 1.7 percent in June when dividends are included. The Stoxx Europe 600 Index lost 2.9 percent. The MSCI Asia Pacific Index fell 1 percent.

Stocks pared declines in the final days of the month. The 4.2 percent gain since June 24 in the MSCI All-Country World Index was led by groups most tied to economic growth, with energy, raw-material, financial and industrial companies posting advances of 4.3 percent or more. The index rose 0.1 percent today.

During the past four days, Treasury 10-year notes slid in the longest losing streak since February as the Federal Reserve ended its $600 billion purchase program known as quantitative easing. They also slumped as S&P said it would cut the U.S. credit rating to the lowest level if the government fails to increase the debt limit.

Swiss Franc

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

The Swiss franc had the biggest gain among major currencies in June, strengthening 1.6 percent versus the dollar and 0.9 percent against the euro. The yen appreciated 1.2 percent versus the greenback, while the euro increased 0.7 percent. In the quarter, the franc gained 9.4 percent, the euro rose 2.4 percent and the yen increased 3.2 percent versus the dollar.

“We have clearly taken out the Greek risk as far as it impacted Treasuries,” said David Ader, head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “From this day forward, we will have to deal with the Treasury supply on our own. We are adjusting to the new world.”

Yields on benchmark 10-year Treasury notes dropped to 2.84 percent on June 27, the lowest since December, before ending the month at 3.16 percent. The yield fell 2 basis point today.

Greek Yields

Greek two-year note yields fell two basis points, or 0.02 percentage point, to 27.30 percent yesterday. They climbed to a record 30.32 percent on June 16 as Papandreou struggled to win support for budget cuts and S&P cut the nation’s debt ranking to CCC, the world’s lowest sovereign rating. The yield dropped a further 63 basis points today.

The worst may not be over for Greece, even after the nation’s parliament passed the first part of an austerity plan, said Andrew Balls, Pacific Investment Management Co.’s head of European fund management.

“The challenges on the fiscal side look very large indeed,” Balls said June 29 in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “My concern is we’ll be back here in a few weeks, or a couple of months, when we have another real stressful period again because the program will be going off track.”

U.S. Unemployment

U.S. unemployment reached 9.1 percent in May and the Conference Board’s consumer sentiment index dropped to 58.5 from 61.7, figures from the New York-based private research group showed June 28. Home values in 20 cities declined 4 percent in the 12 months through April, according to the S&P/Case-Shiller index.

“The data were definitely on the weak side through the month,” said Thanos Bardas, a managing director in Chicago at Neuberger Berman LLC, which oversees about $85 billion in fixed- income assets. “A self-sustaining economy is all about jobs.”

Wheat futures traded in Kansas and Chicago led the decliners among commodities in June, dropping 18 percent and 17 percent respectively, followed by silver and natural gas. Sugar soared 26 percent, paring the year-to-date loss to 9.2 percent.

Concerns about the pace of U.S. recovery and China’s rising interest rates discouraged investors from buying commodities, curbing gains from the rally that started in July 2010, said Tobias Merath, the Zurich-based head of commodities research at Credit Suisse Group AG. Raw materials were advancing “too quickly” during the first four months of this year, the analyst said.

Crude Declines

Oil slid for a second month after the Paris-based International Energy Agency announced on June 23 the release of 60 million barrels of oil over 30 days from member nations’ emergency stockpiles as fighting in Libya pares global supplies. Oil futures fell 4.6 percent on the day the announcement was made and finished the month down 7.1 percent. The quarterly decline of 11 percent was the worst performance since 2008.

Crude for August delivery closed at $95.42 yesterday on the New York Mercantile Exchange, 1 cent above the settlement price on June 22, the day before the IEA announcement. Prices have risen 4.4 percent this year and 26 percent in the past year. August crude slid 0.8 percent to $94.68 a barrel today.

“It’s more like an economic soft patch and doesn’t look like we are moving into a double-dip recession,” Merath said. “The weakness is coming to an end or has already ended, and at the current value it’s good to add to positions. If you are an investor, it’s good time to buy. If you are a consumer, it’s a good time to hedge.”

--With assistance from Maria Petrakis and Natalie Weeks in Athens, Mike Dorning and Julianna Goldman in Washington, Lucy Meakin in London and Betty Liu and Daniel Kruger and Cecile Vannucci in New York. Editors: Dave Liedtka, Nick Baker

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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