Stocks, Commodities Drop on China Economy Concern; Dollar Gains

March 15 (Bloomberg) -- Stocks retreated, led by emerging markets, and commodities headed for the longest slump in 13 months amid concern that China and India will seek to restrict economic growth to curb inflation. The dollar rallied.

The Standard & Poor’s 500 Index, which closed at a 17-month high on March 11, lost 0.5 percent to 1,144.59 at 2:07 p.m. in New York. The MSCI Emerging Markets Index slipped 1 percent as the Shanghai Composite Index plunged 1.2 percent. Oil, copper, lead and nickel declined as a gauge of commodities fell for a sixth straight day. Treasury 10-year notes fell on speculation the Federal Reserve will say the U.S. economy is showing signs of recovery.

Premier Wen Jiabao may take steps to cool China’s expansion and economists predict India will raise interest rates after inflation in both nations accelerated to a 16-month high. European finance ministers meet in Brussels today to discuss how to help Greece overcome its debt crisis. The U.S. Federal Reserve will detail its outlook for interest rates tomorrow.

“There’s concern about China,” said John Lynch, who helps manage $142 billion as chief market analyst at Evergreen Investments in Charlotte, North Carolina. China, he said, is in “a situation where they have to make sure that people can eat and if inflation gets out of control, you’re talking about millions of people struggling to find a meal. On top of that, there’s some trepidation going into the Fed meeting especially given the run we’ve had in the stock market.”

Banking Rules

Financial shares in the S&P 500 retreated 0.6 percent. Goldman Sachs Group Inc. and Morgan Stanley lost at least 1.5 percent. Senate Banking Committee Chairman Christopher Dodd unveiled a plan to overhaul financial rules and empower the Federal Reserve to break up large firms that pose a “grave threat” to U.S. economic stability.

U.S. equities retreated even after reports showed U.S. industrial production unexpectedly grew 0.1 percent in February and manufacturing in the New York region increased for an eight straight month. Google Inc. slumped 3.9 percent to $556.84 on growing speculation it will shut its China Web site.

Declines in the U.S. were limited as Wal-Mart Stores Inc. climbed 2.8 percent after Citigroup Inc. recommended the shares, while PepsiCo Inc. rose 1.3 percent on plans to boost its dividend and buy back up to $15 billion in shares.

The Stoxx Europe 600 Index fell 0.7 percent. BHP Billiton, the world’s largest mining company, paced a retreat in basic- resources shares, falling 1.5 percent in London. Deutsche Telekom AG, Europe’s biggest phone company, slid 0.8 percent in Frankfurt as BofA Merrill Lynch Global Research downgraded the shares to “underperform.”

Dollar Gains

The Dollar Index, which tracks the currency against those of six U.S. trading partners, ended three days of declines, rising 0.5 percent to 80.267. The dollar strengthened against 15 of 16 major counterparts, gaining 1 percent versus the British pound and 0.7 percent against the euro. It slipped 0.1 percent against the yen.

Futures trading shows wagers on the pound weakening against the dollar outnumber bets on a gain by eight times more than when George Soros made $1 billion on the U.K. currency’s decline in 1992.

The U.S. and U.K. are “substantially” closer to losing their AAA credit ratings, with both nations spending about 7 percent of this year’s revenue on debt payments, Moody’s Investors Service said. Greece, which is trying to cut its budget deficit to 8.3 percent of gross domestic product this year from 12.7 percent last year, must repay bondholders more than 20 billion euros by the end of May.

Pound, Gilts

While the pound has tumbled about 7 percent against the dollar in 2010, U.K. government bonds have gained, with the yield on the benchmark 10-year gilt falling 4 basis points to 4.05 percent today. The FTSE 100 Index of stocks, which lost 0.6 percent today, has climbed 3.3 percent this year, more than the 2.7 percent increase in the S&P 500.

The cost of insuring against default on European corporate bonds rose. The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings climbed 14 basis points to 425, the highest since March 5, according to JPMorgan Chase & Co. prices at 3:37 p.m. in London. The index fell last week to the lowest in almost two months. Credit default swaps on U.S. and U.K. debt were little changed.

The MSCI Asia Pacific Index declined 0.5 percent. Newcrest Mining Ltd., Australia’s biggest gold producer, dropped 1.5 percent in Sydney.

Asian Shares

China Merchants Bank Co. sank 2.4 percent in Hong Kong trading after Morgan Stanley said it expects “multiple” increases in bank-reserve ratio requirements. ICICI Bank Ltd., India’s second-largest lender, declined 1.4 percent. Egypt’s EGX 30 Index dropped 3.2 percent, the steepest retreat among benchmark equity gauges worldwide.

Copper for delivery in May fell 1.9 percent $3.315 a pound in New York, leading declines in industrial metals. Crude oil for April delivery was down 2 percent at $79.64 a barrel on the New York Mercantile Exchange. Analysts surveyed by Bloomberg expect the Organization of Petroleum Exporting Countries to keep production quotas unchanged at a meeting in Vienna in two days time.

The Reuters/Jefferies CRB Index of 19 energy, agricultural and metal prices lost 0.9 percent for a sixth-straight decline.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Stuart Wallace in London at swallace6@bloomberg.net.