Bloomberg News

Stocks Drop as Dollar, Treasuries Rise Before EU Summit

June 25, 2012

Stocks, Euro Decline Before EU Summit as Treasuries Gain

The S&P 500 extended losses after last week’s 0.6 percent retreat. Photographer: Richard Drew/AP Photo

Stocks slid, while the dollar and Treasuries rose, amid concern a meeting of European leaders this week will fail to halt a debt crisis that threatens to drag U.S. corporate earnings to the first decline since 2009. Oil slumped while agricultural commodities rallied.

The MSCI All-Country World Index (MXWD) fell for a third day, losing 1.4 percent at 4 p.m. in New York, and the Standard & Poor’s 500 Index retreated 1.6 percent. The dollar strengthened against 15 of 16 major peers, with the euro dipping below $1.25. Ten-year Treasury note yields fell seven basis points to 1.61 percent. The Spanish 10-year yield increased 26 basis points. Oil tumbled below $80 a barrel for a third day while corn and soybeans surged on concern dry weather will hurt crops.

Failure by leaders at the summit to come up with measures to shore up the weakest countries may be “fatal” for the euro, billionaire investor George Soros said yesterday, while German Chancellor Angela Merkel rejected joint euro-area bonds or bills in a speech today. Greek Prime Minister Antonis Samaras, who is recovering from surgery and won’t attend the summit, accepted the resignation of Finance Minister Vassilios Rapanos today.

“Expectations in Europe are really low and usually by this stage, when we’re going into one of these summits, there’s normally a bit more hope around,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “They like to take things to the brink in order to engineer the outcomes they want,” he said. “It’s a pretty risky game to pursue, but it’s not the first time it’s happened.”

Market Leaders

The S&P 500 has retreated 7.4 percent from a four-year high in April as Europe’s debt crisis spread and economic data pointed to a slowing recovery. Stocks resumed losses today after briefly trimming declines when Commerce Department data showed demand for new U.S. homes rose more than forecast in May, with purchases climbing 7.6 percent to a 369,000 annual rate.

Indexes of technology, financial and energy shares lost at least 1.9 percent to lead declines in all 10 main industry groups in the S&P 500 today. Bank of America Corp., Intel Corp. and Hewlett-Packard Co. lost more than 3.3 percent for the biggest declines in the Dow Jones Industrial Average, which sank 138.12 points to 12,502.66.

Alcoa, the largest U.S. aluminum producer, is scheduled to report second-quarter results on July 9 to start the earnings season for Dow companies. Profits at S&P 500 companies fell 1.1 percent in the April-June period, according to analyst estimates compiled by Bloomberg. That would mark the first year-over-year decrease since 2009.

Earnings Pessimism

Earnings pessimism is reaching levels last seen during the global financial crisis of 2008 and 2009, based on company guidance. Fifty-nine corporations issued profit projections that trailed analyst estimates during the 20 days through June 22, or 3.1 times the number of those that exceeded them. The ratio has been greater than 3 for eight straight days, the longest stretch in three years. It was at least that high the majority of the time between October 2008 and April 2009, climbing to 11.5 in December 2008, the data show.

The Stoxx Europe 600 Index (SXXP) dropped 1.5 percent. Unicredit SpA and BNP Paribas SA led a selloff in banks, both falling at least 5.5 percent. Nokia Oyj lost 11 percent amid speculation Samsung Electronics Co.’s earnings may miss some analyst estimates. Shire Plc slumped 11 percent after regulators approved a generic version of its second-biggest selling drug.

Spain’s IBEX-35 Index sank 3.7 percent and Italy’s FTSE-MIB Index tumbled 4 percent, the most in two months, while Greece’s ASE Index sank 6.8 percent to lead losses among 24 developed markets tracked by Bloomberg.

Dollar Climbs

The euro slipped 0.5 percent to $1.2504 after dipping as low as $1.2471. The shared currency lost 1.5 percent against the yen and weakened against 10 of 16 major peers. The Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, jumped 0.2 percent.

Policy makers should create a European Fiscal Authority to purchase sovereign debt in return for Italy and Spain implementing achievable budget cuts, Soros said in London. Funding would come from European Treasuries backed by each euro member, he said. Germany’s Merkel, speaking to a conference in Berlin as Spain announced it would formally seek aid for its banks, dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive.”

Spanish Bank

European banks slumped 3 percent as a group to lead declines in all 19 industries tracked by the Stoxx 600. Spanish banks may have their credit ratings cut by Moody’s Investors Service for a second time in less than six weeks after the nation’s sovereign rating was lowered, said three people with knowledge of the situation.

Cyprus said today it will seek a financial lifeline from the euro area’s firewall funds, becoming the fifth of the euro’s 17 member states to seek a bailout.

A visit by the international creditors to determine how far Greece has slipped behind on budget targets that underpin access to the international funds was suspended. Greek President Karolos Papoulias will represent the country at this week’s summit as Samaras convalesces after surgery for a detached retina. Finance-Minister designate Rapanos resigned after being hospitalized on June 22 for nausea and dizziness.

‘Similar Symptoms’

“I think I speak for all of us when I say, ‘We feel your pain,’” Ed Yardeni, president and chief investment strategist at Yardeni Research Inc. in New York, wrote in a note to clients. “We are all starting to show similar symptoms as we suffer through the never-ending insanity of the European financial crisis and the latest round of emergency summits.”

The Italian two-year yield climbed 54 basis points to 4.33 percent, with the similar-maturity Spanish yield advancing 42 basis points. The Belgian five-year note yield dropped four basis points to 2.00 percent as the government sold 2.8 billion euros ($3.5 billion) of 2017, 2022 and 2032 bonds. Germany sold 2.045 billion euros of 12-month bills, while France auctions as much as 8.4 billion euros of short-dated securities.

The 30-year U.S. Treasury bond yield declined eight basis points to 2.68 percent.

The S&P GSCI Index of commodities added 0.7 percent as 18 of 24 raw materials tracked by the gauge advanced. Corn and soybeans rallied more than 3.5 percent. Much of Iowa and Illinois, the biggest U.S. corn and soybean-growing states, will be mostly dry until at least June 29, according to the National Weather Service.

Oil Retreats

Oil dropped 0.7 percent to $79.21 a barrel in New York, erasing earlier gains of as much as 1.2 percent, as tropical Storm Debby shifted away from offshore energy installations.

The MSCI Emerging Markets Index (MXEF) slipped 1.3 percent, falling for a third day. The Shanghai Composite Index slid 1.6 percent to the lowest close since Jan. 16. The ISE National 100 Index fell 1.6 percent in Istanbul. Turkey is weighing a response after Syria shot down one of its warplanes in international airspace, Foreign Minister Ahmed Davutoglu said.

Egypt’s EGX30 Index jumped 7.6 percent, the most since February 2008, after Mohamed Mursi, the Muslim Brotherhood candidate, was declared the country’s first freely elected president.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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