U.S. stocks sank as a surge in Italian bond yields intensified the credit crisis and concern grew that European leaders may be unable to keep the euro zone intact. The euro slid to a one-month low and Treasuries rallied.
The Standard & Poor’s 500 Index lost 3.7 percent to close at 1,229.1 at 4 p.m. in New York, its worst drop in almost three months. The Stoxx Europe 600 Index slid 1.7 percent and yields on Italian government debt climbed to records. The euro fell as much as 2.3 percent to $1.3523, the weakest since Oct. 10. The yield on 10-year Treasuries sank 11 basis points to 1.97 percent. The S&P GSCI Index of commodities lost 1.3 percent as oil retreated from the highest price in three months.
German Chancellor Angela Merkel’s party may adopt a motion to allow nations to exit the euro without losing membership in the European Union, a senior lawmaker said. Earlier declines came after LCH Clearnet SA, a clearing firm that guarantees investors’ trades are completed, demanded larger deposits to back transactions of Italian bonds and Silvio Berlusconi’s offer to resign as prime minister triggered questions about who will lead Italy out of its crisis.
“The contagion effect is no longer a risk, it’s a fact in Europe,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview. “Today’s news is Italy. The question is -- is it too big too fail, too big to bail?” he said. “If anyone exits the euro, that will be a game changer.”
Merkel’s Christian Democratic Union may adopt a motion at an annual party congress next week to allow euro members to exit the currency area. The motion has been accepted by the party for debate and probably has enough support to be passed by delegates, Norbert Barthle, the ranking CDU member of parliament’s budget committee, said today in a telephone interview in Berlin.
Separately, Reuters reported unnamed sources as saying Germany and France are discussing plans for a “radical overhaul” of the EU that may include a smaller euro zone. A French government official told Bloomberg News there are no plans to shrink the 17-nation euro area. Speculation about such a step is ridiculous, said the official, who spoke on condition of anonymity.
The S&P 500 halted a two-day rebound from its first weekly loss since September. Berlusconi’s offer to quit after austerity measures are passed triggered an afternoon rally yesterday that sent the index up 1.2 percent on optimism a new Italian leader may be more successful in taming the debt crisis.
Citigroup Inc., Bank of New York Mellon Corp. and JPMorgan Chase & Co. tumbled more than 7 percent to lead declines in all 24 stocks in the KBW Bank Index (BKX), which sank 5.9 percent for its worst loss since Aug. 10. While the index of lenders is down more than 25 percent in 2011, it has trimmed its slump from 36 percent as of Oct. 3.
JPMorgan and Bank of America Corp. led losses in all 30 stocks in the Dow Jones Industrial Average, which sank 389.24 points, or 3.2 percent, to 11,780.94. Best Buy Co. rose 1.4 percent for the only gain in the S&P 500 after Cleveland Research said the electronics retailer may post its first monthly comparative sales gain in six quarters.
General Motors Co. (GM) tumbled 11 percent, its worst drop since its post-bankruptcy initial public offering a year ago, after rescinding its target for break-even results in Europe, a region where it hasn’t turned an annual profit in more than a decade. Adobe Systems Inc. slid 7.7 percent after the largest maker of graphic-design software cut its earnings forecast.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, surged 32 percent to 36.16 for its biggest increase in almost three months.
The dollar strengthened against 14 of 16 major peers and the Dollar Index, a gauge of the currency against six key counterparts, climbed 1.7 percent.
Almost 10 shares fell for each that rose in the Stoxx 600 and all 19 industry groups retreated. European markets closed before the Handelsblatt report. Admiral Group Plc plunged 26 percent, the most since its initial public offering in 2004, as the U.K. car insurer said a period of higher-than-expected personal injury claims would lower reserves. Mediaset SpA, the broadcaster controlled by Berlusconi, fell 12 percent.
The yield on Italy’s 10-year bond rose 48 basis points to 7.25 percent and the two-year yield surged 82 basis points to 7.20 percent, both reaching euro-era records. Rates on 10-year Italian debt climbed to a record 5.75 percentage points above benchmark German bunds.
Insuring Against Default
The cost of insuring against default on Italian government also debt rose to a record. Credit-default swaps on Italy jumped 47 basis points to 571, surpassing the previous record of 534 set Sept. 22, according to CMA. That compares with 750 basis points for Irish debt, 1,074 for Portuguese bonds and 94 for German bunds. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased 14 basis points to a one-month high of 342.
German Finance Minister Wolfgang Schaeuble told lawmakers that Italy should request aid if it needs it from the European Financial Stability Facility, two people present at the meeting in Berlin today said. European Central Bank Executive Board member Juergen Stark said the bank won’t become the lender of last resort to European governments.
“Policy makers have been, in a sense, the proverbial frog in the boiling water, putting out little fire after little fire without recognizing the bigger problem at hand and not trying to get in front of it,” Joseph Lupton, senior global economist at JPMorgan Chase & Co. in New York, told Bloomberg Television. “The EU summit of a couple weeks ago, the ink hasn’t even been on the paper yet, let alone dried, and markets are already puking on that. So something else needs to happen.”
LCH Clearnet increased the so-called deposit factor for Italian bonds due in seven-to-10 years to 11.65 percent, the French unit of the clearinghouse said on its website dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7. The additional costs will be applied from close-of- day positions today, LCH said. Italy has 1.9 trillion euros of debt, the world’s fourth biggest and more than Greece, Spain, Portugal and Ireland combined.
The clearing firm said it has no plans to increase margins for trading of other nations’ bonds and will monitor all markets. LCH raised margins on Italy “because we’ve seen more volatility and less liquidity,” John Burke, the firm’s head of fixed income in London, said. “Liquidity is the key issue.”
“The whole move dates to European banks releasing Q3 results that showed how much euro peripherals’ debt we had offloaded in the third quarter,” Ray Attrill, head of currency strategy for BNP Paribas SA in New York, said in a telephone interview. “Since European bank regulators have effectively decreed that European sovereign debt is no longer risk-free for the purposes capital-ratio calculations, that’s caused a structural shift in the enthusiasm for financial institutions holding sovereign debt.”
Italy may be “beyond the point of no return” in becoming the next victim of Europe’s debt crisis even if the government implements austerity measures to reduce debt, Barclays Capital analysts say.
“Once set in motion, these self-reinforcing negative dynamics are very difficult to break,” analysts Michael Gavin, Piero Ghezzi and Antonio Garcia Pascual wrote in an e-mailed note late yesterday. “Prompt and effective policy action from Rome may be necessary to remove Italy from the downward spiral that threatens it, but we doubt that is sufficient.”
Greek Prime Minister George Papandreou’s drive to put together a unity government fell into disarray as rival parties squabbled over the next premier, undermining their bid to secure bailout funds needed to prevent a financial collapse.
All 24 commodities tracked by the S&P GSCI Index fell except for coffee, led by declines of at least 3.2 percent in cocoa, zinc and Kansas wheat. Oil slipped 1.1 percent to $95.74 a barrel, resuming losses after gaining earlier as U.S. government data showed an unexpected decline in crude inventories and tumbling fuel stockpiles.
Gold futures declined from a seven-week high as the dollar’s surge curbed demand for the precious metal as an alternative investment.
The MSCI Emerging Markets Index fell for the first time in four days, losing 1.4 percent. Benchmark gauges in Brazil, Russia, Poland and Hungary declined at least 2.5 percent. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong climbed 2.2 percent as Chinese inflation slowed to a five-month low.
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