Bloomberg News

U.S. Stocks Slump as Italy Bond Yields Soar to Euro-Era Record

November 10, 2011

Nov. 9 (Bloomberg) -- U.S. stocks fell, sending the Standard & Poor’s 500 Index toward its biggest loss since September, as a surge in Italian yields to euro-era records bolstered concern that Europe’s debt crisis is worsening.

Equities extended losses as Handelsblatt reported that German Chancellor Angela Merkel’s party wants to make it possible for European nations to exit the euro area. Morgan Stanley and Goldman Sachs Group Inc. dropped at least 6.9 percent, following losses in European lenders, after LCH Clearnet SA raised the extra charge it levies on clients for trading Italian government bonds and index-linked securities.

The S&P 500 slid 3.4 percent to 1,232.44 as of 2:20 p.m. New York time, after rising 1.8 percent over the previous two days. The Dow Jones Industrial Average lost 377.70 points, or 3.1 percent, to 11,792.48. The Stoxx Europe 600 Index decreased 1.7 percent, erasing an earlier advance, as the 10-year Italian note yield topped 7 percent for the first time in the euro era.

“It’s just like a scary movie as it never ends,” Keith Wirtz, who oversees $16.7 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a telephone interview. “The overarching problem is that most of the economies in Europe can’t sustain the size of their governments. We’re going to have this headache for a long time to come.”

Today’s equity slump erased the month-to-date gain in the S&P 500. Stocks snapped a five-month losing streak in October on optimism European leaders were taking steps to solve region’s debt crisis. Benchmark gauges rose yesterday as Prime Minister Silvio Berlusconi’s offer to resign boosted optimism Italy would appoint a new leader who can tame the crisis.

In the Middle

The deposit factor for Italian bonds due in seven-to-10 years will rise to 11.65 percent, the French unit of LCH Clearnet said. That compares with a charge of 6.65 percent announced on Oct. 7. Clearing houses guarantee that investors’ trades are completed by standing in the middle of two counterparties, and raise margin requirements to protect themselves against losses should one side of the trade fail.

German Chancellor Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion. Greek President Karolos Papoulias will hold a meeting of political party leaders tomorrow at 10 a.m. to discuss the formation of a national unity government, an official from the president’s office told reporters in Athens today.

‘Greek Flu’

“The Greek flu is hitting Italy,” James McDonald, chief investment strategist at Northern Trust Corp. in Chicago, which manages $643 billion, said in a telephone interview. After Berlusconi’s resignation offer, the market wants to know “who’s going to be the new leadership?” he said. “Until they know the new leadership’s willingness to implement reforms, they are going to require higher compensation through higher yields on Italian bonds. The risk is that this feeds on itself.”

About 11 stocks fell for each gaining on U.S. exchanges. All 10 groups in the S&P 500 retreated as gauges of financial, commodity and industrial companies slumped at least 3.7 percent. The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, soared 31 percent to 35.98. The measure slumped 30 percent in October, the most since July 2010.

The KBW Bank Index sank 5 percent as all 24 stocks retreated, extending this year’s slump to 26 percent. Morgan Stanley retreated 7.7 percent to $15.98. Goldman Sachs erased 6.9 percent to $101.05.

Worsening Economy

General Motors Co. declined 9.5 percent to $22.67. The automaker, which hasn’t turned an annual profit in Europe in more than a decade, fell after rescinding its target for break- even results in the region. Europe operations lost $292 million before interest and taxes in the quarter. GM said it no longer expects to break even on an EBIT basis before restructuring costs in Europe, citing “deteriorating economic conditions.”

Adobe Systems Inc. lost 7.9 percent to $28.01. The company plans to cut 750 jobs as it lessens its focus on older products. The reduction, mostly in North America and Europe, will cost $87 million to $94 million before taxes, the company said. After the costs, net income will be 30 cents to 38 cents a share, compared with a previous forecast of 41 cents to 50 cents.

Concern that Europe’s debt crisis may thwart a global economic recovery sent the Morgan Stanley Cyclical Index down 4.4 percent. The Dow Jones Transportation Average of 20 stocks slumped 3.8 percent. FedEx Corp., operator of the biggest cargo airline, slipped 4.4 percent to $79.40. Apple Inc., the biggest technology company, lost 2.4 percent to $396.46.

Commodity Shares Sink

Energy and raw material producers retreated as the dollar rose, reducing the appeal of commodities as alternative investments. Alcoa Inc., the largest U.S. aluminum producer, slid 4.6 percent to $10.29. Chevron Corp. fell 3.9 percent to $104.57.

Four stocks in the S&P 500 rose today. Best Buy Co., the world’s largest consumer-electronics, rose the most in the index. The shares advanced 1.9 percent to $27.36, extending yesterday’s 1.4 percent gain.

Yahoo! Inc. rose 1.2 percent to $16.16. Alibaba Group Holding Ltd. and Softbank Corp. are talking with private-equity funds about making a bid for all of the company without the company’s blessing, people with knowledge of the matter said. Representatives of Sunnyvale, California-based Yahoo, China- based Alibaba and Tokyo-based Softbank declined to comment.

‘Bear Mode’

The S&P 500 may halt its biggest gain in 20 years, according to two indicators studied by technical analysts at UBS AG. October’s 11 percent rally, which was the biggest monthly advance since 1991, failed to leave the S&P 500 above its 200- day average, limiting the potential for a rally, the Zurich- based analysts wrote in a report yesterday.

The team also said their model for moving average convergence-divergence, or MACD, is heading into “bear mode.”

“We see the risk of more near-term weakness into next week,” Marc Muller and Michael Riesner wrote in the report. “Given the high volatility, we would see a pullback into next week still as a trading opportunity for aggressive traders, whereas, on the upside, we wouldn’t chase the market.”

--Editor: Jeff Sutherland

To contact the reporter on this story: 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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