Bloomberg News

U.S. Stocks Drop While Treasuries Gain as Euro Retreats

May 25, 2012

The euro pared its biggest five-day decline in seven weeks after signs that Europe’s debt crisis is damping growth curbed demand for the currency. Photographer: Kostas Tsironis/Bloomberg

The euro pared its biggest five-day decline in seven weeks after signs that Europe’s debt crisis is damping growth curbed demand for the currency. Photographer: Kostas Tsironis/Bloomberg

U.S. stocks retreated, trimming a weekly rally, while Treasuries rose and the euro traded at a 22- month low amid growing concern about Spain’s finances and plans to force some investors to take losses on debt holdings at failing European banks. Spanish and Italian bond yields rose.

The Standard & Poor’s 500 Index slipped 0.2 percent to 1,317.82 at 4 p.m. in New York, while emerging market equities capped a 10th weekly slide in their longest slump since 1994. Ten-year U.S. note yields lost four basis points to 1.74 percent. The euro slipped 0.1 percent to $1.2515 and dipped below $1.25 for the first time since July 2010. Spain’s 10-year yields added 15 basis points and Italy’s rose 10.

The Bankia group, the Spanish lender nationalized earlier this month, will seek 19 billion euros ($23.8 billion) in government money to restructure its business following loan losses. Spain is analyzing requests from regional governments to help them regain access to capital markets, Deputy Prime Minister Soraya Saenz de Santamaria said today. Catalonia’s government said it is complying “strictly” with its budget program and will honor its commitments.

“People are wondering if there are other skeletons in Spain’s regional government closets,” said Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc. His firm oversees $3.68 trillion as the world’s largest asset manager. “Greece is critical, but still relatively small in the euro zone. The same cannot be said of Spain.”

Four Straight Gains

Fewer than 5 billion shares changed hands on U.S. exchanges today, the slowest trading day of the year, according to data compiled by Bloomberg. U.S. markets are closed May 28 for the Memorial Day holiday.

The S&P 500 (SPX) retreated after gaining for four straight days, leaving it up 1.7 percent in the week. This week’s rebound followed an 8.7 percent slump from a four-year high in April through May 18 that dragged the index’s price-to-earnings ratio to as low as 13.1, the cheapest valuation using reported earnings since November, according to data compiled by Bloomberg.

Gauges of industrial, commodity and financial shares fell at least 0.4 percent to lead losses among eight of the 10 main industry groups in the S&P 500. Boeing Co. (BA:US), Caterpillar Inc., JPMorgan Chase & Co. and Chevron Corp. slid at least 1.2 percent for the worst losses in the Dow Jones Industrial Average. Facebook Inc. sank 3.4 percent, following a two-day gain.

Euro Bonds

U.S. stocks reversed losses late yesterday after Italian Prime Minister Mario Monti said most of the region’s leaders support sales of joint euro-area bonds to fight the debt crisis.

The majority of EU leaders at a Brussels meeting this week backed joint euro-area government bonds, Monti told Italy’s La7 television station yesterday. German Chancellor Angela Merkel left the door open to a compromise on debt sharing in the region.

“There’s an air of inevitability that we’ll get euro bonds,” Donald Williams, chief investment officer at Platypus Asset Management Ltd. in Sydney, which manages about $1 billion, said in an interview with Susan Li on Bloomberg Television’s “First Up.” “Germany is going to have to compromise more than it was willing to a few months ago. Ultimately there will be some resolution there and the markets will start to head higher again.”

The MSCI All-Country World Index fell 0.2 percent today, trimming this week’s gain to 0.7 percent. The index snapped a string of three weekly losses that drove it to 12.9 times reported earnings, the cheapest valuation this year. More than $4 trillion was erased from the value of global equities in the first three weeks of the month as concern deepened Greece will abandon the euro. European leaders failed to come up with a plan to resolve the debt crisis at a summit this week.

European Shares

The Stoxx Europe 600 Index (SXXP) climbed 0.2 percent and increased 1.5 percent in the week, snapping a three-week drop.

Trading in Bankia SA (BKIA), the publicly traded banking business of the nationalized Spanish lender, was suspended. The unraveling of Bankia has deepened concern about the health of Spain’s banks and increased the government’s financing costs as it struggles with the debt crisis.

Bankia, Banco Popular Espanol SA and Bankinter SA had their credit ratings cut to junk by S&P, which cited Spain’s weakening economy. S&P cut Bankia to BB+ from BBB- and its parent BFA, which was nationalized this month, was cut to B+ from BB-, the company said in statement today. Popular and Bankinter were reduced to BB+, and Banca Civica SA, set to merge with CaixaBank SA, was cut to BB.

Bank Concern

Draft plans obtained by Bloomberg News showed the European Union will seek to give regulators the power to impose writedowns on senior unsecured creditors at failing banks as part of measures to get taxpayers off the hook for saving crisis-hit lenders.

The writedown powers would apply to senior unsecured debt and derivatives, while some other claims, including secured debt and deposits that are protected by government guarantee programs, will be protected from losses, according to the guidelines.

The euro weakened against 11 of 16 major peers, while the dollar strengthened against 13.

“I would be very wary of calling the bottom for the euro at this point,” said Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon Corp. “Going into the long weekend there has been an acceleration in U.S. Treasury inflows in a reaffirmation of the resolutely negative sentiment that is in place for all European assets.”

Real Rallies

Brazil’s real rose against all of its most-traded counterparts, surging 2.1 percent to 50 U.S. cents, as the central bank said it will offer currency-swap contracts at auction.

The Dollar Index (DXY), which tracks the currency against six major peers, increased 0.1 percent to the highest level since September 2010.

The S&P GSCI Index of commodities increased 0.3 percent, rising for a second day as wheat, zinc and silver climbed more than 1 percent to lead gains in 17 of 24 materials.

The MSCI Emerging Markets Index (MXEF) was little changed and poised for a 10th weekly decline, the longest string of losses since 1994. The Shanghai Composite Index lost 0.7 percent today. China’s largest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit, three bank officials with knowledge of the matter said. Indonesia’s Jakarta Composite Index (JCI) sank 2.1 percent, the biggest loss since Nov. 1 and the most in Asia.

To contact the reporters on this story: Allison Bennett in New York at abennett23@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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