Bloomberg News

Stocks, Italian Bonds Decline Amid Bailout Concern; Yen Tumbles

November 07, 2011

Oct. 31 (Bloomberg) -- Stocks retreated from an almost three-month high as Italian and Spanish bonds fell amid concern European leaders will struggle to raise funds to contain the region’s debt crisis. The yen sank from a post-World War II record against the dollar after Japan intervened in the market.

The MSCI All-Country World Index lost 3 percent at 4:24 p.m. New York time, trimming its monthly rally to 10 percent, still the most since April 2009. Deutsche Bank AG, BNP Paribas SA and Morgan Stanley dropped at least 8.6 percent. The Standard & Poor’s 500 Index slipped 2.5 percent, the most since Oct. 3. Italian five-year yields rose 13 basis points to 5.88 percent. German bunds and U.S. Treasuries advanced. The yen tumbled as much as 4.6 percent against the dollar, the most since 2008. Copper futures fell 2 percent.

Equities extended losses in the last hour of trading after Greek Prime Minister George Papandreou said he will put the European Union’s new deal on financing for Greece to a referendum. Stocks fell, led by banks, following the biggest weekly gain since 2009 after China’s official news agency Xinhua said the country can’t play the role of “savior” for Europe and as a MF Global Holdings Ltd. unit filed for bankruptcy.

“Some of that rally that we’ve seen were on comments that China would provide support to Europe,” Mark Bronzo, who helps manage $23 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “If you get a comment saying that they can’t be viewed as a savior, the market will react,” he said. “MF Global declaring bankruptcy is certainly not a positive for the perception about the financial sector.”

Last Week’s Surge

The MSCI All-Country World Index jumped 5.6 percent last week after European leaders increased the region’s rescue fund to 1 trillion euros ($1.4 trillion) and investors agreed to a voluntary writedown of 50 percent on Greek debt. The index posted the biggest monthly gain since April 2009.

Stocks extended losses after Panpandreou said today that he will ask his citizens to vote on the rescue package.

“For the new agreement, we must go to a referendum for Greeks to decide,” he told lawmakers of his ruling socialist Pasok party in statements carried live today from Athens on state-run Vouli TV. “Democracy is alive and well and Greeks are being called to rise to a national duty beyond the regular electoral processes.”

Equities and commodities fell today after a measure of banks’ reluctance to lend to one another in Europe rose to the highest in almost a month. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, climbed to 81 basis points from 78 on Oct. 28. That’s the highest since Oct. 5 and compares with 89 points on Sept. 23, when the measure was its widest since 2009.

Deutsche Bank, BNP

Financial stocks helped lead losses in the MSCI index, dropping 3.8 percent as a group. Deutsche Bank slumped 8.6 percent, BNP Paribas retreated 9.6 percent and Morgan Stanley fell 8.7 percent. Citigroup Inc. lost 7.5 percent.

Energy, raw-material and financial companies led declines in the S&P 500, retreating at least 3.8 percent. Yahoo! Inc. lost 5.6 percent after five people familiar with the situation said the company is leaning toward selling its Asian assets and redistributing the proceeds to shareholders, rather than selling itself to a group of buyers.

The Stoxx Europe 600 Index retreated 2.2 percent as all 19 industries declined.

“We’re not out of the woods yet,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $300 billion. “Europe did get a rescue that buys them more time, but they are not anywhere near a resolution to their crisis. In addition, we’ve been on a buying stampede. The market was due for a pullback.”

‘Pretty Cataclysmic’

Zero-coupon Italian debt maturing in December 2012 fell toward 94 percent of face value after closing at 96.16 on July 4. MF Global said in an Oct. 25 presentation to investors that 91 percent of its $3.2 billion of short-term Italian holdings were in securities due to mature in December 2012. Chairman and Chief Executive Officer Jon Corzine said on an Oct. 25 conference call that the largest single position was an Italian zero-coupon bill maturing Dec. 31, 2012.

“It shows that if you have the wrong position you can end up with pretty cataclysmic consequences,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “No doubt the movement in bond prices has helped take them to the current position.”

Italy, Germany

Yields on Italy’s 10-year government debt added seven basis points to 6.09 percent, widening the difference over benchmark German bunds to 407 basis points.

The Spanish-German 10-year yield spread widened 19 basis points to 352 basis points. German 10-year yields dropped 15 basis points to 2.03 percent, while equivalent-maturity Treasury yields were 19 basis points lower at 2.13 percent.

The yen lost 3 percent versus the dollar and 0.9 percent against the euro after Japan stepped into foreign-exchange markets to weaken the currency for the third time this year. The yen fell against all of its most-traded counterparts tracked by Bloomberg. The euro fell 2.1 percent versus the dollar.

Gold futures dropped the most in more than a week after the dollar surged, reducing demand for the precious metal as an alternative investment. Gold for December delivery slumped 1.3 percent to $1,725.20 an ounce.

The MSCI Emerging Markets Index declined for the first time in seven days, falling 1.9 percent and paring its October rally to 13 percent. The Hang Seng China Enterprises Index dropped 1.1 percent, led by property-related companies after Premier Wen Jiabao said the government should “firmly” maintain real- estate curbs.

“In this kind of environment, you should think more about tactics, so while I want to invest in the market, while I want to buy and sell stocks, I’m going to be a little more cautious,” Laszlo Birinyi, founder of Westport, Connecticut- based Birinyi Associates Inc., said during an interview on Bloomberg Television’s “Street Smart” with Adam Johnson. “I want to recognise that there’s a lot of volatility, and quite frankly, it’s likely to last for a while.”

--With assistance from Matthew Brown, Claudia Carpenter, David Goodman, Will Hadfield, Michael Patterson, Anchalee Worrachate, Paul Dobson and Maria Kolesnikova in London and Debarati Roy and Jimi Corpuz in New York. Editors: Nick Baker, Chris Nagi

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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