Stocks, Euro Retreat, Treasuries Gain as Europe Concern Grows

Global stocks extended the biggest three-day slump since March and the euro weakened as Ireland’s debt rating was cut to junk, adding to signs Europe’s crisis is spreading. Treasury 10-year yields touched a 2011 low.

The MSCI All-Country World Index lost 0.8 percent at 4 p.m. in New York, extending its three-day plunge to 3.4 percent. The S&P 500 fell 0.4 percent to 1,313.64 and is down 2.9 percent in three days. The euro weakened 0.4 percent to a four-month low of $1.3978. Treasury 10-year yields decreased four basis points to 2.89 percent and slid as low as 2.81 percent. Sugar, wheat and corn rose at least 4 percent to lead gains in commodities.

A late-day rally in U.S. stocks faded as Moody’s Investor Service’s reduction of Ireland to non-investment grade wiped out gains triggered by signs the Federal Reserve has not ruled out further stimulus efforts. Alcoa Inc. (AA), the largest U.S. aluminum producer, tumbled 1.3 percent after starting the second-quarter earnings season following the close of trading yesterday.

“There’s not a whole lot of conviction in the market,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $80 billion in assets. “Most investors are following Europe, and they are waiting to see if the earnings season will be good enough for them to get excited about equity prices. If that doesn’t happen, then you can add corporate performance to the ugly mix.”

Earnings Season

Others companies reporting earnings this week include JPMorgan Chase & Co., Citigroup Inc. and Google Inc. S&P 500 profits are forecast to have grown 13 percent in the quarter, the smallest increase in two years, according to data compiled by Bloomberg. Energy and raw material producers are forecast to lead the growth among 10 groups, with increases in excess of 40 percent each.

Chipmakers slumped, with Intel Corp. falling 1.8 percent, after Novellus Systems Inc. (NVLS) forecast lower-than-estimated third- quarter earnings. Novellus sank 11 percent.

Cisco Systems Inc. (CSCO), the largest networking-equipment company, rallied 1.1 percent for the biggest gain in the Dow Jones Industrial Average. The company may cut as many as 10,000 jobs, or about 14 percent of its workforce, to revive profit growth, according to two people familiar with the plans.

The S&P 500 fell below the level of 1,316 that represents the convergence of the index’s mean price over the last 50 and 100 days, data compiled by Bloomberg show. Moving averages are cited by analysts who use price charts as points where buying may pick up or selling snowball as investors reconsider past decisions. The gauge’s 200-day level is about 1,274.

Fed Minutes

The S&P 500 drifted between gains and losses for most of the day before rising as much as 0.6 percent after the 2 p.m. Washington time release of minutes from the Fed’s last policy meeting. The minutes showed “a few members” of the Federal Open Market Committee believed the central bank might have to consider additional monetary stimulus if economic growth is not strong enough to reduce the unemployment rate.

Equities erased those gains as Ireland joined Portugal and Greece to become the third euro-area country to be lowered to junk.

Almost $1 trillion was wiped off the value of global equities yesterday while Italy’s 10-year yield jumped more than 40 basis points in two days and the U.S. Treasury yield dropped to the lowest this year amid concern the debt crisis was spreading to Italy. The link between sovereign risk and bank risk is potentially “explosive,” and in Italy it poses an “element of fragility,” European Central Bank Executive Board member Lorenzo Bini Smaghi said yesterday in Milan.

Europe Talks

Riskier assets reversed some losses early today Italy and Greece sold debt and Luxembourg Finance Minister Luc Frieden said selective default on Greek debt is not an option envisioned by euro-region finance ministers, while European Union Economic and Monetary Affairs Commissioner Olli Rehn said officials reached agreement that investors should play a role in a second bailout of Greece. EU President Herman Van Rompuy said he didn’t rule out calling an emergency summit on the debt crisis, even as no decision has been taken yet.

In the U.S., Senate Republican Leader Mitch McConnell proposed a “last choice option” for increasing the U.S. debt limit in three stages in case President Barack Obama and Congress can’t agree on a deficit-reduction plan. McConnell’s plan would let the president raise the limit, while accompanying it with a larger amount of spending cuts, unless Congress disapproved his plan with a two-thirds majority, the aide said.

“The market is going to be volatile around the information that’s coming out of Italy and what the European Union is doing with that, and as well as what’s going on with our own debt talks,” said Tom Wirth, senior investment officer for Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York.

Greece Strategy

European finance chiefs cast about for a strategy to halt Greece’s debt crisis as the contagion spread to Italy. The 17 euro governments pledged to flesh out a new master plan “shortly” after nine hours of talks yesterday. The meetings resumed today with all 27 EU finance ministers plotting a response to the release of bank stress tests later this week.

Spanish bonds erased earlier declines, with the yield on the 10-year note decreasing 18 basis points to 5.85 percent. The Irish 10-year yield rose 15 basis points to 13.35 percent, near the highest since before the euro was introduced in 1999, while the Greek 10-year yield slipped 24 basis points to 16.78 percent. The yield on the German bund reversed earlier declines.

Italy, Greece Auctions

Italy sold 6.75 billion euros of treasury bills in its first auction since borrowing costs began soaring amid contagion from the Greek debt crisis. The Treasury in Rome said it sold the one-year bills, meeting its target, at an average yield of 3.67 percent. That compares with a yield of 2.147 percent when similar securities were last sold on June 10. Demand for the debt was 1.55 times the amount sold, compared with 1.71 times at the June auction.

Greece sold 1.625 billion euros of 182-day bills, the nation’s debt agency said. Investors bid for 2.88 times the securities offered, the Public Debt Management Agency said. Belgium’s borrowing costs for 12-month treasury bills rose to the highest level in more than 2 1/2 years as demand fell in the sale of 1.07 billion euros of the bills.

The euro pared its losses after weakening as much as 1.5 percent against the Swiss franc, falling to a record low of 1.15533. The Dollar Index, which tracks the U.S. currency against those of six trading partners, rose for a third day. The New Zealand dollar declined against 15 of 16 of its most-traded peers monitored by Bloomberg, sliding 1.3 percent against the U.S. currency.

The Markit iTraxx SovX Western Europe Index of government credit-default swaps retreated from a record, slipping 7.5 basis points to a mid-price of 283.5.

European Stocks

About five shares declined for every two that gained in the Stoxx Europe 600 Index, which pared its loss to 0.6 percent after slumping as much as 2.7 percent. Banks in the gauge recovered most of a 3.8 percent, still falling 0.2 percent to a two-year low. Thomas Cook Group Plc (TCG), Europe’s second-largest tour operator, plunged 28 percent after cutting its full-year profit forecast.

The MSCI Emerging Markets Index retreated 1.9 percent. The Hang Seng China Enterprises Index tumbled 3.7 percent, the most since May 2010, after Moody’s said some Chinese companies are engaging in potentially risky business practices. The Bombay Stock Exchange Sensitive Index dropped 1.7 percent as Infosys Ltd., India’s second-largest software exporter, forecast sales that missed analysts’ estimates.

The S&P GSCI index of commodities rallied 1.4 percent, reversing an early 1.4 percent slide. Sugar prices rose 5.4 percent to a four-month high on speculation that supplies will be lower than forecast in Brazil, the world’s biggest grower and exporter.

Oil futures for August delivery rose 2.4 percent to $97.43 a barrel on the New York Mercantile Exchange after earlier dropping below the 200-day moving average for front-month prices.

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Victoria Stilwell in New York at vstilwell@bloomberg.net.

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

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