Bloomberg News

Stocks Drop, Euro Erases Gain as Division Arises in Europe Talks

October 19, 2011

Oct. 19 (Bloomberg) -- U.S. stocks fell and the euro erased gains as a split emerged between France and Germany on ways to boost the European bailout fund, while the Federal Reserve said companies grew more pessimistic about the economy. Apple Inc. slid the most since 2008 as earnings trailed estimates.

The Standard & Poor’s 500 Index sank 1.3 percent to close at 1,209.88 at 4 p.m. in New York after earlier climbing to 1,229.64, above its highest closing level since Aug. 3. Financial shares in the index lost 1.7 percent as a group, reversing a 1.5 percent rally. The euro was little changed at $1.3748 after climbing 0.9 percent earlier. The S&P GSCI Index of commodities fell 1.7 percent, wiping out a 0.9 percent gain.

Stocks, the euro and commodities turned lower as France and Germany disagreed on the role of the European Central Bank in leveraging the rescue fund and banks lobbied against forced recapitalizations and larger writedowns of Greek debt. French President Nicolas Sarkozy flew to Germany to join the talks as European leaders assembled in Frankfurt in an effort to narrow divisions before an Oct. 23 summit.

“Time is running out for Europe,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $550 billion. “The longer it waits to fix itself the more uncertainty there is. We set the top of the range on the S&P 500. It would take a lot of good news to get through 1,230.”

Bailout Expansion

U.S. equities extended gains in the final hour of trading yesterday, sending the S&P 500 up 2 percent, after the Guardian newspaper reported that France and Germany agreed to boost the bailout fund to 2 trillion euros. In contrast, the Financial Times Deutschland said German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin that the fund’s firepower may be increased to a maximum of 1 trillion euros.

Group of 20 finance chiefs last week set the Oct. 23 meeting as a deadline for action by European officials. German Chancellor Angela Merkel this week sought to lower expectations that the crisis-fighting effort would climax at the summit in Brussels.

The Federal Reserve said the economy maintained its expansion last month, while companies reported more doubt about the strength of the recovery.

“Overall economic activity continued to expand in September, although many districts described the pace of growth as ‘modest’ or ‘slight,’” the Fed said in its Beige Book survey. “Contacts generally noted weaker or less certain outlooks for business conditions.”

Apple Earnings

Technology shares fell 2.2 percent as a group and were the biggest drag on the S&P 500 as Apple slumped 5.6 percent after profit trailed analysts’ estimates for the first time in at least six years as customers waited for the new iPhone model to go on sales.

Alcoa Inc., Bank of America Corp. and Johnson & Johnson tumbled at least 2.8 percent to lead losses in the Dow Jones Industrial Average, which slipped 72.43 points, or 0.6 percent, to 11,504.62.

Many stocks that rose earlier on better-than-estimated earnings either pared gains or followed the market lower. Citigroup Inc. slipped 1.6 percent after earlier surging 4.9 percent. The bank agreed to pay $285 million to settle claims by the Securities and Exchange Commission that it mislead investors about a $1 billion collateralized debt obligation tied to the U.S. housing market in which the bank bet against investors.

Earnings Season

Morgan Stanley, owner of the world’s largest brokerage, trimmed its gain to less than 0.1 percent after climbing as much as 6.6 percent after an accounting gain from debt valuations and higher stock-trading revenue lifted results.

Intel Corp. pared a 4.7 percent rally to 3.6 percent. The world’s biggest chipmaker forecast fourth-quarter sales that exceeded some analysts’ projections.

The S&P 500 has rebounded 10 percent from a 13-month low on Oct. 3 as U.S. economic data and corporate earnings topped forecasts and speculation grew that European leaders will do more to tame the region’s debt crisis.

Earnings-per-share topped analysts’ estimates at about 73 percent of the 55 companies in the S&P 500 that released quarterly results since Oct. 11, according to data compiled by Bloomberg. Net income grew 14 percent for the group and sales increased 9.3 percent.

“Earnings season is pointing to an economy that is not weakening,” Jonathan Golub, chief U.S. market strategist at UBS Securities LLC, said today on Bloomberg Radio’s “The First Word.”

Housing Starts

A gauge of homebuilders erased gains after rallying earlier on a Commerce Department report that showed builders began work on 658,000 houses at an annual rate in September, up 15 percent from August and the most since April 2010. The median forecast in a Bloomberg survey called for a 590,000 pace.

The 10-year Treasury note yield decreased two basis points to 2.16 percent, while the rate on the 30-year bond was little changed at 3.18 perceng.

Copper, sugar and lead fell more than 2.8 percent to lead losses in 21 of 24 materials tracked by the S&P GSCI index. Crude oil slipped from a one-month high, falling 2.5 percent to $86.11 a barrel in New York.

The Stoxx Europe 600 Index closed up 0.6 percent as optimism grew during the European trading session that officials would reach an agreement to increase the bailout fund.

Software AG, Tele2 AB and British Sky Broadcasting Group Plc rallied after reporting results. Hochtief AG gained 3.7 percent as Goldman Sachs Group Inc. upgraded the construction company. Banks in the index rose 2.1 percent as a group even as EU regulators raided lenders that offer financial derivatives linked to the Euro Interbank Offered Rate in a collusion investigation.

Spain Downgrade

Spanish bonds slumped after Moody’s Investors Service yesterday reduced its ranking to its fifth-highest investment grade, cutting it by two levels to A1 from Aa2, with the outlook remaining negative. The Spanish five-year bond yield increased five basis points to 4.70 percent, climbing for the seventh day, the longest stretch since December.

Greek two-year note yields jumped 18 basis points to 76.63 percent, increasing for the fourth straight day and approaching a record high set in September. Greek Prime Minister George Papandreou won a preliminary vote on a new round of austerity measures, sending a signal to euro-area leaders that Greece will hold to its bailout program amid social unrest. Protesters clashed with police in central Athens as lawmakers used tear gas to hold back demonstrators from the parliament building.

The Irish two-year yield surged 82 basis points, up for a third day.

The MSCI Emerging Markets Index rose 0.6 percent after yesterday’s 1.7 percent slide. Banks led the Hang Seng China Enterprises Index of Chinese shares traded in Hong Kong 1.2 percent higher as lower money-market rates signaled the nation’s central bank will inject more funds into the financial system. South Korea’s won strengthened 1.1 percent against the dollar after the nation agreed to increase a currency-swap accord with Japan to $70 billion.

--With assistance from Stephen Kirkland in London, Susanne Walker in New York and Mark Deen in Paris. Editors: Michael P. Regan, Nick Baker

To contact the reporters on this story: Michael P. Regan in New York at mregan12@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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