U.S. Stocks Drop on Europe Concern; S&P Pares Loss in Final Hour

U.S. stocks fell, giving the Standard & Poor’s 500 Index its longest slump in almost a month, amid concern that Europe’s debt crisis is worsening. Equities pared losses in the final 30 minutes of trading.

The benchmark measure trimmed its drop from 2.9 percent as companies most-tied to economic growth rebounded, propelling the Morgan Stanley Cyclical Index to a 0.2 percent gain for the day. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) decreased more than 3.4 percent on concern about a global financial crisis. Exxon Mobil Corp. (XOM) and Alcoa Inc. (AA) lost at least 1.3 percent on speculation that demand for commodities will slow.

The S&P 500 lost 0.7 percent to 1,165.24 at 4 p.m. in New York. The benchmark gauge has fallen 4.4 percent in three days, the longest drop since Aug. 8. The Dow Jones Industrial Average slumped 100.96 points, or 0.9 percent, to 11,139.30 today.

“The big worry is the situation in Europe,” John Carey, a Boston-based money manager at Pioneer Investments, said in a telephone interview. The firm oversees about $250 billion. “Until we have some resolution of that crisis, we’re going to have continued turbulence in the market. I still think the chance of a recession is less than 50 percent. However, there’s the risk that sentiment just turns so negative that people crawl back into their holes and we do have another downturn.”

The U.S. stock market was closed yesterday for a holiday, as global equities fell, Italian bonds dropped for an 11th day and the cost of government and bank default insurance rose to records amid concern about Europe’s debt crisis.

Trimming Losses

Benchmark gauges trimmed losses in the final minutes of trading as investors, including Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York, cited “short covering” after the selloff. “The markets were hit hard and we will get some news from Europe and also hear from President Obama,” he wrote in an e-mail.

A stagnant labor market and bleaker business and consumer sentiment may require more effort from President Barack Obama and Federal Reserve Chairman Ben S. Bernanke to spur growth. Obama has requested a joint session of Congress on Sept. 8 for an address to unveil his proposals to promote job growth. In a letter to House Speaker John Boehner, Obama said that the nation faces “unprecedented” economic challenges.

The MSCI All-Country World Index fell a fourth day. The franc weakened the most since the creation of the euro after the Swiss central bank imposed a ceiling on the franc for the first time in more than three decades and pledged to defend the target with the “utmost determination.”

Lower Forecasts

HSBC Holdings Plc cut its forecast for global economic growth for the next two years and said the efficacy of any further stimulus measures will be limited. The world economy will grow 2.6 percent this year and 2.8 percent in 2012, compared with estimates published in June of 3 percent and 3.4 percent respectively, London-based HSBC economists including Stephen King and Madhur Jha said in a note to clients today.

“Healthy economic recovery is now but a distant dream,” they wrote. “For the developed world, the downgrades are particularly aggressive whereas, for the emerging world, the reductions are more modest, helped by the ongoing support offered by China and India.”

Stocks pared losses earlier today after the Institute for Supply Management’s index of non-manufacturing businesses increased to 53.3 in August from 52.7 a month earlier, beating the median 51 projection by economists in a Bloomberg News survey. A reading above 50 signals expansion. The Tempe, Arizona-based group’s index averaged 56.1 in the five years to December 2007, when the last recession began.

Most-Tied

Companies most-tied to economic growth rebounded from the lows of the session. Hewlett-Packard Co. (HPQ) lost 2.9 percent to $23.63, after falling as much as 5.9 percent. General Electric Co. (GE) decreased 3.2 percent to $15.25, paring an earlier drop of 4.8 percent.

Bank of America declined 3.6 percent to $6.99, while JPMorgan lost 3.4 percent to $33.44. The two lenders were among 17 banks sued by the U.S. to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac. The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits on Sept. 2 in New York state and federal courts and in federal court in Connecticut.

U.S. government-backed firms and agencies should “stop punishing banks” and suspend demands for mortgage repurchases because they are impeding an economic recovery, according to Paul Miller of FBR Capital Markets & Co. Repurchase losses may total $121 billion, wrote Miller, a former federal bank examiner, in a note to clients dated today. He previously said the tally might range from $54 billion to $106 billion.

Commodity Producers

Gauges of energy and raw-material producers in the S&P 500 fell at least 0.6 percent as the S&P GSCI index of 24 commodities lost 0.5 percent. Exxon slid 1.4 percent to $71.15. Alcoa decreased 2.2 percent to $11.77.

Temple-Inland Inc. (TIN) rallied 25 percent to $30.85. International Paper Co. (IP), the world’s largest pulp and paper maker, said it agreed to acquire the Austin, Texas-based company for $3.7 billion, ending a three-month battle for control of the shipping-box manufacturer.

A measure of momentum for the S&P 500 is showing a similar pattern to one that preceded the previous two bear markets in U.S. stocks and could presage more losses, according to WJB Capital Group Inc.

‘Signal Line’

For the first time since 2007, the benchmark’s Moving Average Convergence/Divergence line, calculated by subtracting the index’s average level during the past 26 months from the average over the past 12 months, crossed below the “signal line” that plots the 9-period average difference between the two, according to Bloomberg data. The 12-month moving average itself is still rising.

“The only thing that’s missing, to date, from the S&P repeating the 2000 and 2008 turndowns is a rolling over in its 12-month moving average,” John Roque, a senior technical analyst at WJB in New York, wrote in a note to clients today.

The last two times the cross below the signal line occurred -- December 2007 and April 2000 -- the S&P 500 slumped 54 percent and 47 percent, respectively, before hitting its bottom, Bloomberg data show. Roque said the S&P 500 is at risk of extending losses should the benchmark’s average price during the past 12 months start falling.

UBS AG cut its year-end forecast for the S&P 500 and estimates for earnings in 2011 and 2012 on concern the global economy is weakening. The index will climb 15 percent from its closing level on Sept. 2 to 1,350 at the end of the year, down from an earlier prediction of 1,425, according to Chief U.S. Market Strategist Jonathan Golub.

Earnings Estimates

Thomas Doerflinger, also a strategist at the firm, lowered his estimates for combined profit by companies in the benchmark equity index to $95 a share in 2011 from $99.35 and to $101 a share in 2012 from $108.

Bearish bets by investors using futures contracts on the S&P 500 Index (SPX) increased to the highest level in almost four years in the week ended Aug. 30, according to data compiled by Bloomberg and the Commodity Futures Trading Commission. Short selling involves the sale of securities borrowed from the owner, and generates profit when the trader repurchases them at a lower price and returns them to the owner.

Hedge funds and other large speculators hold a net 107,913 futures contracts wagering that the S&P 500 will decrease in value. The short position is the highest since September 2007, when bearish bets reached a record of 127,474 contracts a month before the benchmark equity gauge reached an all-time high, according to Bloomberg data going back to 1997.

To contact the reporter on this story: 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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