Bloomberg News

U.S. Stocks Drop as Fitch Warns of Debt Contagion; Oil Tops $102

November 16, 2011

Nov. 16 (Bloomberg) -- U.S. stocks fell, erasing yesterday’s gains in benchmark indexes, as Fitch Ratings said further contagion from Europe’s debt crisis would pose a risk to American banks. The euro weakened, while oil climbed to a five- month high above $102 a barrel.

The Standard & Poor’s 500 Index lost 1.7 percent to 1,236.91 at 4 p.m. in New York. Most stocks in the Stoxx Europe 600 Index retreated. The euro slipped 0.6 percent to $1.3460 after losing as much as 0.8 percent. Credit-default swaps insuring Italian and Spanish debt retreated from records and Italy’s 10-year yield fell as the European Central Bank bought the nations’ debt. Oil rallied as Enbridge Inc. planned to reverse the direction of a pipeline, potentially alleviating a bottleneck that had reduced prices.

Stocks slid to their lows of the session in the final minutes of trading after Fitch said that while U.S. lenders have "manageable direct exposures" to Greece, Ireland, Italy, Portugal and Spain, further turmoil in those markets poses a “serious risk.” Benchmark U.S. indexes briefly erased losses earlier as Federal Reserve Bank of Boston President Eric Rosengren said the Fed may need to coordinate with the ECB on fighting turmoil in credit markets.

“It’s fear of the unknown spooking the market,” Madelynn Matlock, who helps oversee about $14.5 billion at Huntington Asset Advisors in Cincinnati, said in a telephone interview. “There may be more exposure to Europe out there than people really think, even if banks think they are covered,” she said. “Increasing oil prices is a concern because it’s like a tax on the consumer.”

‘Adverse Effects’

Early losses in stocks came after Bank of England policy makers said that failure to resolve the European debt turmoil could lead to “significant adverse effects” on the global economy. UniCredit SpA, Italy’s largest bank, prepared to ask central-bank officials to broaden the types of assets accepted as collateral.

Gauges of financial and commodity stocks dropped more than 2 percent to lead losses in all 10 of the main industry groups in the S&P 500. JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc. slid at least 3.8 percent.

Fitch said its current outlook on the U.S. banking industry is stable because of improving fundamentals and ratings that are lower than before the debt crisis.

‘Negative Shock’

“However, risks of a negative shock are rising and could alter this outlook,” the ratings company said today in a statement. “Fitch believes that unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,”

JPMorgan and Goldman Sachs are among the world’s biggest traders of credit derivatives and have disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally. Yet they are among firms that don’t provide a full picture of potential losses and gains from a default, giving only net numbers or excluding some derivatives altogether.

Rambus Inc. plunged 61 percent after it lost a $3.95 billion jury trial over allegations that Micron Technology Inc. and Hynix Semiconductor Inc. prevented its memory chips from becoming an industry standard. Abercrombie & Fitch Co. tumbled 14 percent as the retailer’s profit trailed estimates amid higher costs. Dell Inc. slipped 3.2 percent as the computer maker told investors to expect more slow sales growth for the rest of the year.

Economic Data

Stocks slid even after the Fed said industrial production in the U.S. advanced 0.7 percent in October, more than the median economist forecast and adding to evidence the world’s largest economy is weathering Europe’s crisis. Other data showed the cost of living unexpectedly fell and homebuilder sentiment improved.

The rally in oil came as Enbridge Inc. agreed to acquire ConocoPhillips’s share of the pipeline that runs between Cushing, Oklahoma, and the Gulf Coast and announced the reversal. The change may alleviate a bottleneck at the Cushing storage hub that had lowered the price of West Texas Intermediate, the grade traded in New York, versus other oils.

Oil helped lead the S&P GSCI Index up 0.9 percent even amid declines in 15 of the 24 commodities tracked by the gauge. Nickel and zinc also climbed at least 2.8 percent, while Kansas wheat, silver and natural gas lost at least 1.8 percent.

European Stocks

Among European stocks, Electricite de France SA slid 4.4 percent as the nation’s opposition Socialist and Green parties united to campaign for the closure of 24 nuclear reactors by 2025. Vivendi SA, the owner of the world’s largest video-game and music companies, advanced 5.6 percent after reporting profit that exceeded analysts’ estimates.

Credit-default swaps on Italy dropped 18 basis points to 576, while contracts on Spain were down 11 basis points at 470.

The yield on the 10-year Italian security declined six basis points to 7.00 percent, while the equivalent-maturity Spanish yield added eight basis points to 6.41 percent. French 10-year yields rose three basis point to 3.71 percent and the nation’s borrowing costs relative to benchmark German bunds retreated from a euro-era record.

The ECB bought larger-than-usual sizes and quantities of Italian debt, said two people with knowledge of the trades, who declined to be identified because the deals are private.

Monti Sworn In

Mario Monti was sworn in as Italian prime minister and finance minister, taking over an unelected government charged with imposing austerity to prevent the euro area’s third-biggest economy from succumbing to the debt crisis. Greek Prime Minister Lucas Papademos won a confidence vote in parliament, receiving a mandate to push through budget measures necessary to secure financing designed to avert a collapse of the economy and keep Greece in the euro.

Benchmark German bunds fell, sending 10-year yields up three basis points to 1.82 percent. German Chancellor Angela Merkel said the nation is prepared to cede some national sovereignty to the European Union to achieve closer economic and political ties.

The pound slid for a third day against the dollar after a report showed U.K. unemployment rose in the three months through September as joblessness among young people climbed above 1 million for the first time since at least 1992. The jobless rate climbed to a 15-year high of 8.3 percent. The FTSE 100 Index of stocks lost 0.2 percent.

The MSCI Emerging Markets Index fell 1 percent. The Hang Seng China Enterprises Index in Hong Kong tumbled 2.9 percent, while Taiwan’s Taiex Index fell 1.4 percent. South Korea’s Kospi Index dropped 1.6 percent.

--With assistance from Lynn Thomasson in Hong Kong, Claudia Carpenter, Paul Dobson, David Goodman, Abigail Moses, Andrew Rummer, Daniel Tilles, Jason Webb and Stephen Kirkland in London and Christine Harper and Michael J. Moore in New York. 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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