Euro Weakens, Italian Bonds Decline on Contagion Concerns; Stocks Rebound

Global stocks fell to the lowest level in almost two months, the euro slid and Italian and Spanish bond yields climbed amid concern the European debt crisis is worsening. Gold and the dollar advanced on demand for assets considered the safest, while Treasuries pared gains.

The MSCI World Index lost 0.6 percent and the Standard & Poor’s 500 Index fell 0.6 percent, paring its slide from 1.2 percent after President Barack Obama signaled willingness to work with Republicans to extend some tax cuts. The euro dropped below $1.30 for the first time since September. Costs to insure the debt of Italy, Spain, Portugal and Ireland reached records and yields on Belgium’s government bonds surged. After the U.S. close, S&P 500 futures fell 0.2 percent at 7 p.m. New York time while stock indexes for Japan and Australia were little changed.

Stocks, government securities and the euro are being dragged down by concern Portugal and Spain may suffer the fate of Ireland, which had to ask for an 85 billion-euro ($111 billion) rescue package to help bail out its banks. S&P said today it may cut Portugal’s credit ratings on concern the government has made little progress on boosting economic growth to offset the fiscal drag from scheduled budget cuts.

“It’s a tough place,” said Paul Zemsky, the New York- based head of asset allocation for ING Investment Management, which oversees $550 billion. “While there’s fear of a spillover from the European debt situation, it’s also dangerous to go short U.S. equities here. Once Europe is off the front page, investors will look at U.S. fundamentals again and stocks can rally significantly. If you’re short into that rally, you can lose a lot of money.”

Monthly Drop

The S&P 500 fell for a third day, wiping out what would have been a third straight monthly gain, to leave it down 0.2 percent in November and 3.8 percent below a two-year high reached earlier in the month. The index closed above its 50-day average after briefly dipping below the level, which is watched by technical analysts, for a second day. The Dow Jones Industrial Average slumped 46.47 points to 11,006.02, the lowest since Oct. 19.

Google Inc. slid 4.5 percent, the most since July, as European Union antitrust regulators probed the search engine for allegedly discriminating against competitors. Separately, two people with knowledge of the negotiations said Google is close to an agreement to buy online coupon company Groupon Inc. for about $6 billion.

Bank of America Tumbles

Bank of America Corp. slumped 3.2 percent, the most in the Dow, and costs to protect its debt from default climbed to a 16- month high on speculation damaging information about the company will be leaked on the Internet. Julian Assange, founder of the WikiLeaks website, told Forbes that he’ll release documents from a U.S. bank next year and told Computerworld magazine in 2009 that his group had a hard drive from a Bank of America executive’s computer. Credit-default swaps on the bank soared 24.6 basis points to a 16-month high of 220.1, CMA data showed.

The S&P 500 began paring a loss of as much as 1.2 percent in early trading after the Conference Board’s consumer- confidence index rose to a five-month high and the Institute for Supply Management Chicago-Inc.’s business barometer topped forecasts.

The Dow briefly erased losses after Obama said he asked Treasury Secretary Timothy Geithner and budget director Jack Lew to lead negotiations with congressional Republicans on extending Bush-era tax cuts. Obama said after meeting with congressional leaders that both parties agree action is needed to extend tax cuts to middle-income families before the end of the year even as they remain divided on tax rates for the wealthiest Americans.

Canada Gains

Canada’s S&P/TSX Composite Index climbed 0.4 percent as a rally in gold producers and Research In Motion Ltd. overshadowed data showing economic growth slowed more than economists forecast last quarter. Gross domestic product expanded at a 1 percent annualized third-quarter pace, slower than the 1.5 percent projected by economists in a Bloomberg survey.

The Stoxx Europe 600 Index slipped 0.1 percent, with more than two stocks falling for each that rose. Societe Generale SA, the Paris-based lender, lost 3.6 percent and Ageas, the insurer formerly known as Fortis, dropped 3 percent.

The Shanghai Composite Index dropped 1.6 percent, capping its first monthly retreat since June, after Zhong Jiyin of the Chinese Academy of Social Sciences wrote in a commentary in China Daily that recent increases in banks’ reserve requirements won’t be enough to reverse excessive liquidity in the system.

The euro weakened against all but one of its 16 most-traded peers, falling 1.8 percent to 108.62 yen. The Dollar Index advanced a third day, gaining 0.6 percent to 81.340, the highest intraday level since Sept. 21.

Yield Spreads

The difference in yield between Italian 10-year bonds and German bunds widened to 199 basis points and reached 212 points earlier. The Spanish-German yield spread rose 17 basis points to 284 basis points and the yield premium for Belgian 10-year bonds reached 133 basis points, the most since January 2009.

“Euro-area contagion is becoming fairly indiscriminate,” Valentin Marinov, a currency strategist at Citigroup Inc. in London, wrote in a report today. “There is so far little indication that euro-area politicians will act quickly and forcefully enough to prevent further spread widening. We cannot exclude more euro selling.”

Investors’ mistrust of Spain is unjustified and problems in the banking industry are “manageable,” Deutsche Bank AG Chief Executive Officer Josef Ackermann said. The fundamental economic data “in no way justifies the apparent mistrust that exists in the case of Spain, though not only there,” Ackermann, who also heads the Institute of International Finance, a global industry group with more than 400 members, said today in response to a request by Bloomberg News. “Spain can deal with its problems by itself.”

‘Waking Up Again’

Credit-default swaps insuring Italian government bonds rose 22.5 basis points to 268.4, contracts on Spain increased 12.8 basis points to 364 and Portugal climbed 4.5 basis points to 542.9, all record highs, according to CMA, a data provider.

“The things that we’ve put to bed are waking up again,” said Philip Orlando, the New York-based chief equity market strategist at Federated Investors Inc., which manages $341.3 billion. “Ireland is a problem. The question is how far behind are Portugal and Spain? The market is concerned that this is going to become a bigger deal.”

Ten-year Treasury yields decreased one basis point to 2.81 percent after losing as much as seven basis points, while two- year yields lost five basis points to 0.46 percent.

Gold for immediate delivery rose 1.4 percent to $1,386.10 an ounce, a two-week high. Lion Fund Management Co. will raise up to $500 million in China to invest in overseas exchange- traded funds backed by gold, the first in the country to be approved to do so, Yang Zi, an executive in the fund’s marketing department, said by phone from Beijing.

The S&P GSCI Index of 24 commodities fell 1.1 percent, the most in two weeks. Heating oil for December delivery dropped 4.12 cents, or 1.8 percent, to expire at $2.3169 a gallon on the Nymex.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@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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