Stocks Sink on U.S. Credit Outlook as Euro Falls on Debt Crises

Photographer: Ramin Talaie/Bloomberg

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Photographer: Ramin Talaie/Bloomberg

A trader works on the floor of the New York Stock Exchange in New York.

U.S. stocks sank the most in a month, oil slid and gold rose to a record after Standard & Poor’s cut the American credit outlook to negative and concern about Europe’s debt crisis grew. Greek two-year bond yields surged to 20 percent for the first time since at least 1998.

The S&P 500 tumbled 1.1 percent to 1,305.14 at 4 p.m. in New York, its worst drop since March 16, and the Stoxx Europe 600 Index slid 1.7 percent. Ten-year Treasury notes gained, sending yields down four basis points to 3.37 percent, amid speculation S&P’s move will motivate lawmakers to pass a budget that requires less borrowing. The euro lost 1.4 percent to $1.4234 and Portuguese debt-insurance costs reached a record. The S&P GSCI (SPGSCI) index of commodities slid 1.2 percent as oil sank.

S&P assigned a one-in-three chance it will lower the U.S. rating in the next two years, saying the credit crisis and recession that began in 2008 worsened a deterioration in public finances. Budget differences among Democrats and Republicans remain wide and it may take until after the 2012 elections to get a proposal that addresses the concern, S&P said.

“The fact that the Dow and S&P and Nasdaq fell so sharply after they came out and said that sends a warning to politicians that there are going to be dire consequences if they don’t get their act together,” said Barton Biggs, who runs New York-based hedge fund Traxis Partners LP, in an interview on Bloomberg Television’s “Street Smart.” “I think they will get their act together. We have a system of government that is painful, but in the long run does the right things.”

Broad Decline

Gauges of energy and financial companies had the biggest declines among the 10 main groups in the S&P 500, all of which dropped. Caterpillar Inc., Bank of America Corp. and Alcoa Inc. lost at least 2.3 percent to lead declines in 29 of 30 stocks in the Dow Jones Industrial Average (INDU), which slid 140.24 points, or 1.1 percent, to 12,201.59. Gap Inc. slumped 3 percent after Goldman Sachs cut its rating on the shares to “sell” from “neutral” and said it sees long-term declines in comparable-store sales. The Nasdaq Composite Index lost 1.1 percent.

The S&P 500 has surged 93 percent from its bear-market low in March 2009 amid higher-than-estimated earnings and government stimulus measures. The Federal Reserve and U.S. agencies have lent, spent or guaranteed about $8.2 trillion to lift the economy from the worst slump since the Great Depression, according to data compiled by Bloomberg.

Global Retreat

The MSCI All-Country World Index of shares in 45 countries tumbled 1.5 percent. Global stocks also slid after China increased banks’ reserve requirements to lock up cash and cool inflation, and central bank Governor Zhou Xiaochuan said monetary tightening will continue for “some time.”

Thirty-year Treasury yields lost two basis points to 4.45 percent. Two-year yields slipped three basis points to 0.67 percent. The dollar slid 0.6 percent to 82.66 yen, the lowest level of the month, while still strengthening against 14 of 16 major peers.

The cost to protect U.S. corporate bonds from default rose to the highest level this month. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 1.6 basis points to a mid-price of 95.62 basis points, according to index administrator Markit Group Ltd.

S&P cut its long-term U.S. outlook from stable, while affirming its ‘AAA’ long-term and ‘A-1+’ short-term ratings.

‘Fiscal Destiny’

“This is another indication of the need for the U.S. to better control its fiscal destiny, both for its sake and that of the global economy,” said Mohamed El-Erian, chief executive officer at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest manager of bond funds. “Absent credible medium-term fiscal reform, every segment of U.S. society would be faced with higher borrowing costs, a weaker dollar and a less bright outlook for employment, investment and growth.”

S&P said in its statement that there is a “material risk” U.S. officials may not reach an agreement on how to address budgetary challenges by 2013.

Under President Barack Obama’s fiscal year 2012 budget, released in February, the total debt subject to the ceiling would be $20.8 trillion in 2016. The plan House Republicans approved April 15, written by Budget Committee Chairman Paul Ryan, would need a debt ceiling of at least $19.5 trillion, according to data compiled by Bloomberg Government.

‘Shot Across the Bow’

“It’s truly a shot across the bow and a message to Washington, which has been clowning around on this and playing politics when they should toss ideology aside and focus on achievement,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “It’s a big deal. They’ve put us on notice.”

Treasury Assistant Secretary Mary Miller said today that S&P’s outlook on the U.S. credit rating “underestimates” the nation’s leadership.

“We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation,” Miller said in a statement.

About 18 stocks declined for every one that gained in the Stoxx Europe 600. Commerzbank AG, Spain’s biggest lender, and France’s Societe Generale SA fell more than 3.8 percent. Smith & Nephew Plc (SN/), which had been identified as a bid target for Johnson & Johnson (JNJ) by analysts at Sanford C. Bernstein & Co., Morgan Stanley and Investec Securities, declined 3 percent after Synthes Inc. said it’s in talks about a possible takeover by J&J.

Euro, Greek Bonds

The euro depreciated against 13 of its 16 major counterparts, losing 1.9 percent versus the yen. Portugal’s 10-year yield climbed to a record 584 basis points above benchmark German bunds while the Greek spread reached 1,132 basis points, the most since Bloomberg began collecting the data in 1998.

Credit-default swaps insuring Greek bonds jumped 66 basis points to 1,221, signaling a 64.5 percent chance of a default within five years, while those for Portugal climbed 18.5 basis points to 616.5, according to CMA.

Restructuring of Greece’s debt is inevitable and only a question of time, Die Welt cited a Greek government minister as saying, without naming the minister. Greece isn’t discussing restructuring its debt, Finance Minister George Papaconstantinou said April 16 in Washington. European Central Bank Governing Council members signaled over the weekend they will keep tightening monetary policy this year to curb inflation.

‘A Lot of Risks’

“The European story has a lot of risks to it as Germany is very strong but peripheral Europe is clearly quite weak, so the last thing they need is higher interest rates,” Adrian Mowat, JPMorgan Chase & Co.’s Hong Kong-based chief Asia and emerging-markets strategist, said in a Bloomberg Television interview.

The yield on Germany’s 10-year bund declined 13 basis points to 3.25 percent. The 10-year gilt yield slipped four basis points to 3.56 percent. The pound fell 0.4 percent versus the dollar after Ernst & Young LLP’s Item Club cut its economic outlook for the U.K.

Oil fell for the first time in four days in New York after Saudi Arabia, the world’s biggest crude exporter, said the global market has enough supplies to meet demand. Crude for May delivery slumped 2.3 percent to $107.12 a barrel.

Cocoa for July delivery declined 3.2 percent to $3,057 a metric ton on ICE Futures U.S. in New York amid concern demand for commodities may slow as China fights inflation. Sugar and coffee also fell, while wheat, silver and corn gains. Gold for June delivery climbed 0.5 percent to $1,492.90.

To contact the reporters on this story: Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net

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