Stocks Tumble, Dow Ends Worst May Since 1940

U.S. stocks slid, capping the worst May for the Dow Jones Industrial Average since 1940, while the euro slumped and Treasuries rose as a downgrade of Spain’s debt rating and escalating tensions on the Korean peninsula triggered a flight from riskier assets.

The Dow tumbled 122.36 points, or 1.2 percent, to 10,136.63 at 4 p.m. in New York and lost 7.9 percent this month. The Standard & Poor’s 500 Index sank 1.2 percent to 1,089.41, led by financial shares on the Spanish downgrade and energy companies after U.S. President Barack Obama extended a moratorium on new deep-water drilling. Oil erased gains after rallying as much as 1.6 percent to more than $75 a barrel. Ten-year Treasury yields decreased 7 basis points to 3.3 percent. The euro slipped 0.7 percent to $1.2273.

Equities and commodities extended losses after Fitch Ratings stripped Spain of the AAA rating it’s held since 2003, saying the nation’s economic growth will slow as it attempts to cut its debts. Earlier losses followed disappointing U.S. economic data and a North Korean general’s warning of “all-out war” if any accidental clashes with South Korea break out.

“Spain’s downgrade just adds to more uncertainty,” said Quincy Krosby, chief market strategist for Newark, New Jersey- based Prudential Financial Inc., which oversees about $667 billion. “There are too many geopolitical events. We have a three-day weekend in the U.S., and traders will definitely want to lighten their books.”

‘All-Out War’

Losses in U.S. stocks widened earlier after North Korean Major General Pak Rim Su disputed the results of the international investigation that found his nation sank a South Korean warship. “Any accidental clash that may break out in the waters of the West Sea of Korea or in areas along the Demilitarized Zone will lead to all-out war,” he said, according to North Korea’s official news organization.

About 9.2 billion shares changed hands on all U.S. exchanges, 4 percent below the average for the year as trading slowed before the Memorial Day holiday.

“With volumes being as they are today ahead of the holiday weekend, there is not much in the way of conviction among traders,” said Mark Turner, head of U.S. sales trading at Instinet LLC, which handles about 4 percent of U.S. equity trading volume. “So any headline has the potential to move the market. And the situation in North Korea has especially been in our crosshairs.”

China’s Assurance

The retreat in the S&P 500 today came after the benchmark index rallied 3.3 percent yesterday as China assured investors it was committed to maintaining European investments even as a sovereign debt crisis rattles confidence in the region.

Benchmark indexes pared declines late in the day after Goldman Sachs Group Inc. strategist David Kostin raised his estimates for S&P 500 earnings to $78 a share for this year and $93 a share for 2011, up from $76 and $90, to reflect “strong” first quarter earnings and better-than-estimated profit margins.

The S&P 500 trimmed its advance for the week to 0.2 percent, while the MSCI World Index of shares in 24 developed nations rose 0.6 percent over the past five days. The U.S. gauge sank 8.2 percent in May and the global gauge lost 9.9 percent, the worst month since February 2009 for both and the biggest slide in May for the S&P 500 since 1962.

The Stoxx Europe 600 Index erased gains, dropping 0.3 percent today after rallying as much as 0.7 percent. The MSCI Asia Pacific Index climbed 1.5 percent.

Golf Balls, Scraps

BP Plc slid 5 percent in London after Europe’s second- largest oil company said procedures to plug a leaking well in the Gulf of Mexico may last another day or two. BP added rubber golf balls and scraps to the mud it was pumping into its leaking Gulf of Mexico oil well in an effort to stop the spill.

Baker Hughes Inc., Halliburton Co., Transocean Ltd. and Schlumberger Ltd. slumped at least 4.9 percent to help lead declines in U.S. energy shares.

Obama is suspending exploration in two areas off Alaska, canceling pending lease sales in the Gulf of Mexico and proposed sales off Virginia’s coast, extending by six months a moratorium on deepwater drilling permits and suspending operations at all 33 exploratory wells being drilled in the Gulf.

The gain in Treasuries extended the drop in 10-year yields this month to 36 basis points, the biggest monthly loss since December 2008, as government data showed consumer spending in the U.S. unexpectedly stalled, fueling speculation the economic recovery will be slow.

Lowest Since 2009

The benchmark note yield touched 3.06 percent on May 25, the lowest level since April 29, 2009. Its 17 basis point gain yesterday was the most since June.

A gauge of U.S. corporate credit risk climbed the most in 15 months in May as Europe’s sovereign debt crisis sparked concern that economic growth may slow, making it harder for companies to refinance.

The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1.34 basis points today and 25.2 basis points this month to a mid-price of 117.17 basis points as of 4:19 p.m. in New York, according to Markit Group Ltd. The index, which typically falls as investor confidence improves and rises as it deteriorates, climbed the most since February 2009, according to CMA DataVision.

Credit markets faltered in May as corporate bond sales fell to the least in a decade amid speculation Greece and other nations in Europe won’t be able to meet their debt payments and as the dispute between North Korea and South Korea raised the risk of a broader conflict.

Crude oil for July delivery fell 58 cents, or 0.8 percent, to settle at $73.97 a barrel on the New York Mercantile Exchange. Oil’s 14 percent decline in May was the biggest monthly decrease since December 2008, when prices touched $32.40 a barrel.

Copper for July delivery lost 1.7 percent to $3.1045 a pound in New York. Gold futures rose in New York, capping a second straight monthly gain, on demand for an alternative to holding the euro. Gold for August delivery climbed 60 cents to $1,215 an ounce in New York.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Elizabeth Stanton in New York at estanton@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.