Market Erases 2011 Gains on Recession Concern

Stocks tumbled as the Standard & Poor’s 500 Index had its biggest one-day loss in a year and erased its 2011 gain, while Treasury yields fell to the lowest levels since November, after an unexpected drop in consumer spending added to concern the economy will slide into a recession. Gold and the Swiss franc rallied.

The S&P 500 fell 2.6 percent to 1,254.05 at 4 p.m. in New York, dropping for a seventh straight day in its longest slump since 2008. The Stoxx Europe 600 Index declined 1.9 percent to an 11-month low. Yields on 30-year bonds dropped 17 basis points to 3.91 percent in the biggest decrease since May 2010. The Swiss franc advanced against all 16 major peers as 10-year Italian and Spanish bond yields climbed to euro-era records and gold set an all-time high of $1,661.90 an ounce.

Investors sought the safety of Treasuries, gold and the Swiss currency even as President Barack Obama signed a plan to raise the federal debt limit before a possible default. Attention has shifted to weakening economic data, including today’s 0.2 percent decrease in consumer spending, the slowest growth in personal incomes since November and an index of American manufacturing sinking to a two-year low.

Photographer: Jin Lee/Bloomberg

Traders work on the floor of the New York Stock Exchange on Aug. 2, 2011. Close

Traders work on the floor of the New York Stock Exchange on Aug. 2, 2011.

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Photographer: Jin Lee/Bloomberg

Traders work on the floor of the New York Stock Exchange on Aug. 2, 2011.

“We have a stubbornly slow economy,” Hank Smith, chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania, said in a telephone interview. His firm manages about $6.5 billion. “The economy is stuck in a very slow growth mode, which means that it’s more susceptible to any external shocks.”

Recession Odds

The odds of another U.S. downturn are rising amid cutbacks in spending by consumers and the government, according to five of the nine members of the panel that dates recessions. Harvard University economics professor Martin Feldstein, one of the members of committee at the National Bureau of Economic Research, said he sees a 50 percent chance that the U.S. will relapse into another recession.

“Nothing has given us much growth,” Feldstein said today in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene.

Today’s retreat was the biggest for the S&P 500 since Aug. 11 and left the index down 0.3 percent in 2011 following a rally of as much as 8.4 percent through the end of April. All 10 industry groups fell today, led by declines of more than 3.4 percent in industrial and consumer-discretionary companies.

Pfizer Inc., General Electric Co. and Home Depot Inc. lost at least 4.2 percent to lead declines in all 30 stocks in the Dow Jones Industrial Average. The Dow sank 265.87 points, or 2.2 percent, to 11,866.62 for its biggest loss since June 1. The S&P 500 closed at its lowest level since Dec. 20, while the Dow ended the day at its weakest since March 18.

Earnings Season

Archer Daniels Midland Co., the world’s largest grain processor, tumbled 6.2 percent as earnings trailed projections after corn and tax expenses rose. MetroPCS Communications Inc., the pay-as-you-go mobile-phone carrier, lost 36 percent for the biggest decline in the S&P 500 as sales fell short of analysts’ forecasts.

Two-year Treasury yields decreased five basis points to 0.32 percent and 10-year yields sank 13 points to 2.61 percent. The difference between two- and 10-year yields shrank to 2.29 percentage points, the narrowest since November, as demand reduced the extra yield investors require to hold longer- maturity debt.

Fitch Ratings said the U.S. remains under a review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating. The U.S. needs to confront “tough” choices on tax and spending against a weak economic backdrop if the budget deficit and government debt is to be cut to safer levels over the medium term, Fitch said.

Debt Deal Sealed

President Obama signed a debt-limit compromise that prevents a U.S. default on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.

The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. It won backing from 45 Democrats, 28 Republicans and one independent. The House passed the plan yesterday.

The S&P 500 capped a 3.9 percent weekly loss on July 29, its worst slump in a year, as the Commerce Department reported gross domestic product rose a less-than-forecast 1.3 percent annual rate in the second quarter following a 0.4 percent gain in the prior quarter that was less than previously estimated.

Jobs Watch

Investors also looked ahead to the government’s employment report at the end of the week. The nation is forecast to have added 85,000 jobs in July, according to the median estimate of economists surveyed by Bloomberg, and the unemployment rate is projected to hold steady at 9.2 percent.

“Maybe we’ll get a positive number on Friday, but I wouldn’t be shocked if we got a negative one, and I don’t see any strong job growth at all for the next few months until we get a little bit of momentum in terms of final demand,” David Kelly, the chief market strategist at JPMorgan Funds, said in a Bloomberg Television interview. “You need to have sustained growth of one-and-a-half percent even to produce positive payrolls.”

Fourteen stocks fell for each that gained in the Stoxx Europe 600 Index. Pandora A/S plunged 65 percent as the Danish maker of charm bracelets cut its forecast and Chief Executive Officer Mikkel Vendelin Olesen quit. Metro AG, Germany’s largest retailer, slid 7.5 percent as earnings missed estimates.

The Swiss franc strengthened more than 2.6 percent to a record 1.08467 per euro and appreciated 2.2 versus the dollar. The Dollar Index, which tracks the U.S. currency against those of six trading partners, rose 0.3 percent.

Italy, Spain Yields

The yield on the Italian 10-year bond jumped as much as 25 basis points to 6.25 percent, driving the extra yield investors demand to hold the securities instead of benchmark German bunds to as high as 3.84 percentage points, a euro-era record. The Spanish 10-year yield surged as much as 26 basis points to 6.46 percent, also the highest since the euro was introduced in 1999.

Finance Minister Giulio Tremonti led a meeting of Italy’s stability committee and determined that the recent turmoil on Italian financial markets reflects “international uncertainty.”

“Analysis has shown that despite the efforts to progressively reduce the budget deficit, there are tensions in Italian markets deriving from international uncertainty,” the committee said in a statement after the meeting in Rome.

Credit-default swaps tied to Spain’s debt surged 15 basis points to 405 and Italy’s jumped 25 to 358, according to CMA. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments jumped 13 basis points to 291, approaching the record closing price of 306.5 set July 18.

‘Ugly Contest’

“In this U.S.-versus-Europe ugly contest, it’s hard to decide where to start from,” analysts at BNP Paribas wrote in a research note. “The economic slowdown is blatantly obvious in the large drop in U.S. manufacturing. And the issue of a U.S. downgrade remains open. Things are looking less comfy in Europe too, with Italy spreads again under severe pressure.”

The Standard & Poor’s GSCI index of 24 commodities lost less than 0.1 percent for a fifth straight decline. Crude oil fell to a five-week low, dropping 1.2 percent to $93.79 a barrel. Sugar lost 2.8 percent and gasoline slipped 1 percent.

Corn, Wheat Rally

Corn surged the most in three months, jumping the exchange limit of 30 cents, or 4.4 percent, to close at $7.1575 a bushel. A government report showed adverse weather eroded U.S. crop conditions. Soybeans had the biggest gain in almost three weeks, and wheat jumped to an eight-week high.

The Australian dollar slid 1.6 percent versus the greenback and the yen after the central bank kept its benchmark interest rate unchanged, citing an “acute sense of uncertainty in global financial markets.” Reserve Bank Governor Glenn Stevens held the overnight cash rate target at 4.75 percent in Sydney for a record eighth-straight meeting.

The MSCI Emerging Markets Index of equities lost 2 percent, the steepest drop since May 23. South Korea’s Kospi Index fell 2.4 percent, the most since May 23. The Shanghai Composite Index declined 0.9 percent after an official Xinhua News Agency website said China may boost borrowing costs next week. The Bombay Stock Exchange Sensitive Index dropped 1.1 percent after Reserve Bank of India Governor Duvvuri Subbarao said yesterday that interest rates would have to rise further.

To contact the reporters on this story: Stuart Wallace in London at swallace6@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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