Stocks Decline as Euro Weakens on Greek Default Concern; Treasuries Rally

Stocks fell, halting a five-day rally in U.S. benchmark indexes, and the euro weakened amid concern Greece will fail to qualify for more financial aid needed to avoid default. Treasuries rose, sending two-year yields to a record low, and copper and oil slid.

The Standard & Poor’s 500 Index retreated 1 percent to close at 1,204.09 at 4 p.m. New York time, after plunging as much as 2.3 percent. The Stoxx Europe 600 Index ended down 2.3 percent. The euro depreciated 0.8 percent versus the U.S. currency and the Dollar Index rose for a second day. Ten-year Treasury yields fell nine basis points and the similar-maturity Greek yield rose 183 points. Copper sank to a nine-month low and oil slid 2.6 percent to the lowest price in three weeks.

Equities and the euro trimmed losses as Greece’s Finance Ministry said it had a “productive and substantive discussion” with international officials who will determine if the country gets more bailout funds. In the U.S., President Barack Obama called for $1.5 trillion in tax increases over the next decade to help trim the deficit and the Federal Reserve will discuss the economy at a two-day meeting starting tomorrow.

“The markets are saying the odds are very high of a Greek default,” Frederic Dickson, who helps oversee $28 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon, said in a telephone interview. “Investors expected more action to resolve the Greek debt crisis or provide economic relief to Europe,” he said. “People are expecting a lot from the Fed this week,” he said, which leaves room for disappointment.

Banks Tumble

The S&P 500 fell after rallying 5.4 percent last week, the third-biggest weekly gain since 2009. Gauges of financial companies and energy and commodity producers lost more than 1.4 percent today to lead declines among all 10 of the main industry groups in the S&P 500, with Citigroup Inc. down 4.4 percent and Alcoa Inc. falling 3.3 percent to pace losses.

Tyco International Ltd., the world’s largest publicly traded maker of security systems, rose 2.4 percent after the company said it will break up into three publicly traded companies to drive growth.

The S&P 500 is down 12 percent from a three-year high at the end of April and investors have pulled more money from U.S. equity funds since then than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.

About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.

European Stocks

More than 13 stocks declined for each that advanced in the Stoxx 600, as all 19 industry groups fell. BHP Billiton Ltd. and Rio Tinto Group helped lead mining companies lower, losing more than 3 percent. Barclays Plc, the U.K.’s second-biggest bank by assets, and France’s Societe Generale SA tumbled more than 6.5 percent.

Benchmark indexes for Germany, Italy, France and the U.K. declined at least 2 percent.

The euro slipped 1.1 percent against the yen and depreciated to $1.3687, trimming in half an earlier 1.5 percent drop versus the dollar. The Dollar Index, which tracks the U.S. currency versus those of six trading partners, advanced 0.6 percent. The yen appreciated against all 16 major counterparts.

Fed Meeting

The rebound in the euro and European stocks last week may prove short-lived in the face of increasing pessimism over the region’s debt, if money-market and derivative trading are any indication. While the currency strengthened 1 percent against the dollar and the Stoxx 600 rose 2.5 percent last week, U.S. short-term debt funds have reduced lending to European banks and the cost for financial institutions to fund themselves in dollars rose. Goldman Sachs Group Inc. and Morgan Stanley cut forecasts for the euro this month, and bets against the currency rose to the most in more than a year.

Greece’s ability to avoid default hangs in the balance as international monitors assess whether Prime Minister George Papandreou can meet conditions of rescue loans and the Greek leader canceled a planned week-long U.S. visit. Greek Finance Minister Evangelos Venizelos held a conference call with the heads of the European Union, European Central Bank and International Monetary Fund mission to Athens. The talks will continue in another teleconference tomorrow evening, a statement from the Greek Finance Ministry said.

‘Ducks in a Row’

The inspectors, nicknamed the “troika” by investors, are empowered to judge whether the government is eligible for an aid payment due next month and on track for a second rescue package approved by EU leaders July 21. European leaders are squabbling over terms of the July agreement and the prospect that they will be forced to channel more money to keep Greece in the currency union.

“The timing of a Greek default remains in the hands of the troika and it is difficult to believe that they will decide to pull the plug at this stage because of the potential impact upon the other troubled sovereigns and the banking sector,” Gary Jenkins, a strategist at Evolution Securities in London, wrote in a note to clients today. “Who knows what contingency plans they have prepared behind closed doors,” he wrote. “And on the day that all the ducks are lined up then that might be the day that support for Greece is withdrawn. ”

German Elections

German Chancellor Angela Merkel’s party was defeated in a Berlin state election and her coalition ally lost all its seats after turning skepticism over euro-area bailouts into a campaign theme, stoking government infighting over the debt crisis. The Social Democrats, the main opposition party nationally, extended their 10-year rule in the German capital after beating Merkel’s Christian Democrats into second place in yesterday’s election. Merkel’s Free Democratic coalition partner, known as the liberals, crashed out of a regional assembly for the fifth time this year, while the Pirate Party won its first-ever seats.

The yield on the German 10-year bund dropped six basis points to 1.80 percent, while the Italian yield climbed eight points. That drove the difference in yield between the two securities 14 basis points higher to 379 basis points. The Greek two-year note yield surged 625 basis points, or 6.25 percentage points, to 61.38 percent, snapping a three-day decline. The Greek-German 10-year spread widened 189 basis points to 21.22 percentage points.

‘Coming to a Head’

The Markit iTraxx SovX Western Europe Index of credit- default swaps protecting the debt of 15 governments rose 13 basis points to 339.

“The Greek situation could be coming to a head,” said Khiem Do, the Hong Kong-based head of multi-asset strategy at Baring Asset Management, which oversees about $10 billion. “Some haircut might be needed for Greece if they don’t receive additional funding. That could create a domino effect in countries like Spain, Italy and Portugal. That’s what the market is fearing.”

The yield on the 10-year U.S. Treasury note fell nine basis points to 1.96 percent. The two-year yield touched a record low of 0.1451 percent before ending down one point at 0.1532. Wall Street’s biggest bond traders are stockpiling Treasuries at the fastest pace since 2007 on speculation the Fed will announce a plan this week to buy longer-term debt to spur the faltering economy. The 20 primary dealers held $15.1 billion of Treasury securities due in more than one year as of Sept. 7, the most since December and up from a $75 billion bet against the debt on May 6, Fed data show.

Commodities Slump

The S&P GSCI index of 24 commodities fell 2.2 percent, led by industrial metals and energy. Copper declined as much as 4.2 percent to $3.7655 a pound, the lowest price for a most-active contract since Nov. 30. Gold futures retreated 2 percent to $1,785.90 an ounce, erasing an earlier 1 percent rally, as a stronger dollar reduced demand for an alternative asset.

Oil dropped 2.6 percent to $85.70 a barrel on concern weaker economic growth in the U.S., the world’s largest consumer of crude, and Europe will hurt demand. OPEC Secretary-General Abdalla El-Badri said today that global demand for oil is rising less than expected.

The MSCI Emerging Markets Index declined 2.8 percent to the lowest level in 14 months. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong sank 3.7 percent to the lowest close since May 2009.

To contact the reporters on this story: Rob Verdonck in London at rverdonck@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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