Stocks, Italian Bonds Decline Amid Bailout Concern; Yen Tumbles

Stocks retreated from an almost three-month high as Italian and Spanish bonds fell amid concern European leaders will struggle to raise funds to contain the region’s debt crisis. The yen sank from a post-World War II record against the dollar after Japan intervened in the market.

The MSCI All-Country World Index lost 1.7 percent at 10:40 a.m. New York time, trimming its monthly rally to a record 12 percent. The Standard & Poor’s 500 Index slipped 1.1 percent, giving it an October rally of 12 percent, the biggest monthly gain in 24 years. Italian five-year yields rose 15 basis points to 5.90 percent. German bunds and U.S. Treasuries advanced. The yen tumbled as much as 4.6 percent against the dollar, the biggest drop since 2008. Copper slumped 2.8 percent in London.

China can’t play the role of “savior,” the official Xinhua news agency said yesterday after European leaders agreed last week to boost their bailout fund. Stocks gained on Oct. 26 amid speculation China might invest in the fund. Japanese Finance Minister Jun Azumi said today the government took steps to weaken the yen. Stocks and commodities also fell after a unit of MF Global Holdings Ltd. (MF) filed for bankruptcy.

“Some of that rally that we’ve seen were on comments that China would provide support to Europe,” Mark Bronzo, who helps manage $23 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “If you get a comment saying that they can’t be viewed as a savior, the market will react,” he said. “MF Global declaring bankruptcy is certainly not a positive for the perception about the financial sector.”

Euribor-OIS

A measure of banks’ reluctance to lend to one another in Europe rose to the highest in almost a month. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, climbed to 81 basis points from 78 on Oct. 28. That’s the highest since Oct. 5 and compares with 89 points on Sept. 23, when the measure was its widest since 2009.

Financial stocks in the S&P 500 retreated 2.1 percent after MF Global USA Inc., part of the holding company for the broker- dealer run by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy after making bets on European sovereign debt. Citigroup Inc. (C) lost 5.2 percent, E*Trade Financial Corp. slumped 5 percent and Morgan Stanley (MS) dropped 4.9 percent.

Energy, raw-material and financial companies led declines in the S&P 500, retreating more than 2.6 percent. Yahoo! Inc. lost 4.4 percent after five people familiar with the situation said the company is leaning toward selling its Asian assets and redistributing the proceeds to shareholders, rather than selling itself to a group of buyers.

European Stocks

The Stoxx Europe 600 Index retreated 1.5 percent as 17 of the 19 industries declined. Banks helped lead losses as BNP Paribas (BNP) SA, Societe Generale SA and Deutsche Bank AG (DBK) dropped at least 6 percent. More than half of the 145 companies in the Stoxx 600 that released earnings since Oct. 11 beat analysts’ profit estimates, according to data compiled by Bloomberg.

“We’re not out of the woods yet,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $300 billion. “Europe did get a rescue that buys them more time, but they are not anywhere near a resolution to their crisis. In addition, we’ve been on a buying stampede. The market was due for a pullback.”

Italian five-year yields earlier climbed even after three people said the European Central Bank bought the nation’s debt. Italian 10-year yields added eight basis points to 6.10 percent, widening the yield difference over benchmark German bunds to 403 basis points.

Yield Spread

The Spanish-German 10-year yield spread widened 16 basis points to 349 basis points. German 10-year yields dropped 10 basis points to 2.07 percent, while equivalent-maturity Treasury yields were 11 basis points lower at 2.21 percent. The cost of insuring European government debt rose, with credit-default swaps tied to Italy climbing 29 basis points to 434 and the Markit iTraxx SovX Western Europe Index of 15 governments increasing 12 basis points to 302.

The yen lost 2.7 percent versus the dollar and 1.7 percent against the euro. The euro declined 1 percent to $1.4009. The Dollar Index climbed 1.1 percent.

Gold dropped the most in more than a week in New York as the U.S. dollar surged following Japan’s intervention in foreign-exchange markets, reducing demand for bullion as an alternative investment. Gold for December delivery slumped 1.2 percent to $1,725.60 an ounce.

The MSCI Emerging Markets Index declined for the first time in seven days, falling 1.3 percent and paring its October rally to 13 percent. The Hang Seng China Enterprises Index dropped 1.1 percent, led by property-related companies after Premier Wen Jiabao said the government should “firmly” maintain real- estate curbs.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@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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