Bloomberg News

Stocks, Euro Drop as Treasuries, Bunds Gain on Downgrade Concern

January 17, 2012

Jan. 13 (Bloomberg) -- Stocks fell, trimming a weekly gain, and the euro slid as news that Standard & Poor’s was downgrading the debt of several European nations swirled through markets. U.S. Treasuries rose. German and Dutch yields touched record lows on reports their ratings will be spared.

The S&P 500 declined 0.5 percent to close at 1,289.09 at 4 p.m. in New York after slumping as much as 1.4 percent in the morning. The index pared its weekly gain to 0.9 percent. The Dow Jones Industrial Average slipped 48.96 points to 12,422.06. The euro slumped 1.1 percent to $1.2676, near a 16-month low. Gains in Treasuries sent the 10-year note’s yield down five basis points to 1.87 percent, and Spanish, French and Belgian bonds dropped. Germany’s 30-year yield lost as much as 10 basis points to 2.33 percent.

The ratings cuts, announced after financial markets closed, included France, Italy, Portugal and Spain, while Germany was affirmed at AAA. Financial companies led losses in U.S. stocks after JPMorgan Chase & Co. reported a drop in profit, sending shares of the largest U.S. bank by assets down 2.5 percent. Talks with holders of Greek bonds over proposed writedowns of the debt were paused.

“The cloud of Europe has weighed on investors’ sentiment,” Keith Wirtz, who oversees $14.6 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a telephone interview. “These downgrading actions in Europe were expected down the road, not right now.”

France was cut to AA+ and the rating has a negative outlook, S&P said in a statement. Cyprus, Italy, Portugal, and Spain were cut by two notches, S&P said. The long-term ratings on Austria, Malta, Slovakia, and Slovenia were cut one notch. Belgium, Estonia, Finland, Ireland, Luxembourg and the Netherlands also had their ratings affirmed by S&P.

Financial Shares Slump

Bank of America Corp. and Citigroup Inc. also paced losses in banks, dropping more than 2.6 percent. Declines in trading revenue and investment banking fees sent JPMorgan’s fourth- quarter profit down 23 percent to $3.73 billion, or 90 cents a share, matching the average estimate of 90 cents by 28 analysts surveyed by Bloomberg.

Wells Fargo & Co., Citigroup and Goldman Sachs Group Inc. are due to release results next week. Earnings at S&P 500 companies are projected to have increased 4.6 percent in the last quarter of 2011, the slowest growth in more than two years, according to analyst estimates compiled by Bloomberg. Profits are forecast to have dropped 0.8 percent at financial companies.

Intel Corp., Hewlett-Packard Co. and United Technologies Corp. slipped at least 1.5 percent as gauges of technology and industrial companies fell 0.7 percent each.

The S&P 500 had risen for four straight days, bringing its 2012 advance to 3 percent before today.

Confidence, Commodities

U.S. equities remained lower after today confidence among U.S. consumers rose more than forecast in January to the highest level in eight months, a sign household spending may hold up as the new year begins. The Thomson Reuters/University of Michigan preliminary index of confidence rose to 74 from 69.9 at the end of December, topping the median estimate in a Bloomberg News survey for 71.5.

Coffee, soybeans and cocoa fell more than 2 percent to help lead declines in commodities. Crude for February delivery slipped 0.4 percent to settle at $98.70 a barrel, a three-week low, after two EU officials said an embargo on Iranian crude imports may be postponed for six months.

Among European stocks, Vodafone Group Plc led losses, falling to a three-week low. Invensys Plc slumped 19 percent after revealing 60 million pounds ($92 million) in additional costs. Commerzbank AG rose 3.4 after German newspaper Handelsblatt reported that the lender will raise its capital without seeking government aid.

European Stocks

The Stoxx Europe 600 Index closed down 0.1 percent after rising earlier following a report the European Banking Authority will postpone stress tests, while borrowing costs fell at an Italian debt auction. Italy sold 3 billion euros ($3.8 billion) of bonds maturing in 2014 to yield 4.83 percent, compared with 5.62 percent at the previous auction.

Italian 10-year yields increased one basis point to 6.64 percent, reversing an earlier 18 basis point decrease and climbing eight basis points to 4.88 percentage points above benchmark German bunds. The spread fell yesterday to the lowest since Dec. 20.

Spanish 10-year yields increased nine basis points, Belgian rates increased 10 basis points and French yields added four basis points to 3.08 percent. Dutch 10-year bonds rose, pushing the yield on the securities down to a record-low 2.06 percent.

‘Paused for Reflection’

The group representing Greece’s bank creditors said talks with the government have “paused for reflection” after the discussions failed to produce a “constructive consolidated response by all parties.” The Institute of International Finance said it wants Greece to “re-engage constructively with the private sector” in an e- mailed statement.

A benchmark gauge of U.S. company credit risk rose from almost the lowest level in more than two months on concern Europe’s sovereign-debt crisis will slow the global economic recovery. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, advanced 1.1 basis points to a mid-price of 115.79 basis points.

Companies from SABMiller Plc of London to Macy’s Inc. got corporate bond sales off to a record start in 2012, with issuance climbing 16 percent from the same period last year to $174.9 billion, according to data compiled by Bloomberg. Repsol YPF SA, Spain’s largest oil company, sold the first corporate bonds from the euro-region’s periphery in more than a month yesterday, while Rabobank Nederland, the highest-rated privately owned bank, led issuance of senior, unsecured bank debt.

The MSCI Emerging Markets Index was little changed, capping a 2.8 percent weekly advance. The Shanghai Composite Index slipped 1.3 percent today as speculation of monetary easing in China waned. The index increased 3.8 percent in the week, halting a nine-week slump.

--With assistance from Allison Bennett in New York. Editors: Michael P. Regan, Jeff Sutherland

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net


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