Stocks, Italian Bonds Drop as Euro Weakens on Debt Crisis; Gold Advances

Stocks fell, Italian bonds dropped for an 11th day and the cost of government and bank default insurance rose to records on concern Europe’s debt crisis will worsen. The euro weakened, while the dollar and gold gained.

The MSCI All-Country World Index sank 2 percent at 4:31 p.m. in New York. Banks led the Stoxx Europe 600 Index down 4.1 percent in the biggest two-day slump since March 2009. Italy’s 10-year bond yield rose 27 basis points in the longest sequence of gains since the euro’s debut in 1999. The German bund yield fell to a record low of 1.84 percent. Rates on two-year Greek debt exceeded 50 percent for the first time. Gold futures jumped 1.4 percent. Standard & Poor’s 500 Index futures lost 2.3 percent at 6:24 p.m.

German Chancellor Angela Merkel’s party lost weekend elections in her home state, stoking concern opposition is growing to bailouts for debt-saddled European nations. The U.S. filed 17 lawsuits against banks on Sept. 2 to recover $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac. Citigroup Inc. cut its 2011 global economic growth forecast today to 3.1 percent from 3.7 percent. U.S. markets are closed today for the Labor Day holiday.

“Sovereign risk-related events remain the main market drivers,” Markus Ernst, a strategist at UniCredit SpA in Munich, wrote in a note. “The negative market sentiment is unlikely to change for the better in Europe.”

Deutsche Bank AG Chief Executive Officer Josef Ackermann said conditions in the stock and bond markets are reminiscent of the financial crisis of late 2008.

‘New Normal’

“The ‘new normal’ is characterized by volatility and uncertainty -- not only in respect to market developments, but also in consideration of the future of the financial branch,” Ackermann said today at a conference in Frankfurt organized by Euroforum. “All this reminds one of the fall of 2008, even though the European banking sector is significantly better capitalized and less dependent on short-term liquidity.”

All 19 industries in the Stoxx 600 retreated, with losses ranging between 2.6 percent and 5.9 percent. Deutsche Bank AG, Credit Suisse Group AG, Barclays Plc, Societe Generale SA and Royal Bank of Scotland Group Plc dropped at least 6.6 percent. The Bloomberg Europe Banks and Financial Services Index of 46 stocks dropped almost 10 percent in the past two sessions, to the lowest level since March 31, 2009.

Banks, Insurers

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers soared 13 basis points to 259, according to JPMorgan Chase & Co. The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, rose to 0.77 percentage point, the widest gap since April 2009.

Clariant AG (CLN) tumbled 16 percent, for the biggest decline on the Stoxx 600, after the chemical maker cut its sales and profit-margin projections for this year.

The extra yield investors demand to hold Italian 10-year bonds instead of benchmark bunds climbed 43 basis points to the most since Aug. 5. The yield on the Greek two-year note jumped as much as 3.18 percentage points to 50.38 percent. The 10-year bund yield dropped 16 basis points to 1.85 percent.

Italian Prime Minister Silvio Berlusconi is facing a general strike tomorrow as he seeks parliamentary backing for a 45.5 billion-euro ($65 billion) austerity plan.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose 18 basis points.

Euro, Dollar

The euro weakened for the fifth day versus the dollar, the longest streak since January. It depreciated as much as 1 percent to $1.4061, the weakest level since Aug. 5. The Swiss franc strengthened 1.1 percent versus the euro and 0.3 percent against the dollar, while the yen appreciated against 13 of its 16 major counterparts.

The MSCI Emerging Markets Index dropped 3.2 percent, the most since Aug. 8. Brazil’s Bovespa retreated 2.7 percent. South Korea’s Kospi Index (KOSPI) retreated 4.4 percent. The Shanghai Composite Index slid 2 percent after a measure of Chinese services dropped to a record low.

Gold futures climbed 1.4 percent to $1,902.90 an ounce. Crude oil fell 3.3 percent to $83.60 a barrel and copper futures declined 1.5 percent.

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net

To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net

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