Stocks, Commodities Drop as Euro Weakens on Greek Crisis

Stocks fell, commodities slid to the cheapest level this year and the euro weakened to a three-month low amid growing concern Greece will exit the European currency.

The MSCI All-Country World Index slid 1.6 percent at 4 p.m. in New York and the Standard & Poor’s 500 Index sank 1.1 percent to 1,338.35, with both slipping to the lowest levels in more than three months. The euro slid to less than $1.29 for the first time since January. Yields on U.S. seven-year debt and 10-year U.K. and German bonds fell to records, while costs to insure against a Spanish default jumped to an all-time high. The S&P GSCI gauge of commodities dropped 1.1 percent.

European finance ministers grappled with the costs of keeping Greece in the euro area or letting it go, as a post-election political feud prevents the nation from forming a new government following the May 6 election. President Karolos Papoulias told Greek political leaders that banks face the threat of collapse if deposits continue to dwindle amid the instability. In the U.S., JPMorgan Chase & Co. (JPM) fell for a second day after reporting a $2 billion trading loss.

“The markets are going to play hard ball and the European governments are going to play hard ball too,” John Manley, chief equity strategist for Wells Fargo Advantage Funds in New York, said in a telephone interview. His firm oversees $207 billion. “The odds of Greece leaving the euro are higher. It’s an enormous game of chicken that they are playing with each other. To the degree it does represent the democratic process in Greece, it makes it more likely they default and the Europeans have to do something.”

JPMorgan’s Loss

The S&P 500 fell for a second day as financial companies and energy producers led losses among all 10 of its main industry groups. All but three of 30 stocks in the Dow Jones Industrial Average retreated, sending the gauge down 125.25 points to 12,695.53, its lowest close since Jan. 31.

JPMorgan fell 3.2 percent and lost 12 percent since disclosing the trading loss on May 10, marking its biggest two-day slide in three years. Matt Zames, newly appointed to lead the firm’s chief investment office after it suffered a $2 billion loss on credit derivatives, shook up the unit’s leadership and announced a “renewed focus” on hedging risks. Chief Investment Officer Ina Drew will retire. Fitch Ratings on May 11 cut the bank’s credit rating by one level to A+ from AA-, saying the loss raises questions about its risk management.

Shares of Citigroup Inc. tumbled 4.1 percent and Bank of New York Mellon Corp. lost 3.1 percent to help lead declines in all 24 stocks in the KBW Bank Index (BKX), which slid to the lowest level since March 7. The S&P 500 trimmed its year-to-date gain to 6.4 percent, down from a rally of as much as 13 percent. The index has tumbled 5.7 percent from an almost four-year high on April 2.

Bearish Stock Bets Pared

As individuals bail out of U.S. stocks at the fastest rate in three decades, professional speculators have cut bearish bets by the most since 2008.

Money managers are net short 19,375 contracts on the S&P 500, down 82 percent from a four-year high in September even after the figure jumped from 3,584 last week, data compiled by Bloomberg and the Commodity Futures Trading Commission show. U.S. equity mutual funds recorded $18 billion of outflows in April, the most since at least 1984, according to preliminary data from the Investment Company Institute.

Hedge funds and other institutions are speculating the index will extend its 23 percent rally since October after 69 percent of S&P 500 companies beat first-quarter earnings estimates and economists projected accelerating U.S. growth this year. Bears say last week’s addition to bets on declines show short sellers have completed almost all of the buying they are likely to do, depleting demand for equities.

Bets Versus JPMorgan

Signs are emerging that traders are attempting to squeeze JPMorgan’s positions in credit derivatives. The 10-year Markit CDX North America Investment Grade Index Series 9 jumped the most in almost eight months on May 11. The index is an older, less-active benchmark for credit-default swaps created in 2007 in which JPMorgan trader Bruno Iksil in London was said to have amassed as much as a $100 billion position. Another index contract that takes more concentrated risks on the same companies recorded the biggest two-week surge in two years.

Bonds considered the safest investments rallied, sending yields on some debt to record lows. The rate on seven-year U.S. notes declined as much as six basis points to 1.17 percent, while 10-year German bund yields decreased to as low as 1.43 percent and the U.K. gilt yield touched 1.86 percent.

The Stoxx Europe 600 Index sank 1.8 percent to a four-month low as all 19 industry groups retreated. Opap SA, Europe’s biggest listed gambling company, helped lead Greek stocks lower, tumbling 12 percent for the biggest drop since October. Greece’s benchmark ASE Index traded at the lowest level since November 1992 for a second day, tumbling 4.6 percent. Spain’s IBEX 35 Index lost 2.7 percent, extending this year’s retreat to more than 20 percent.

‘Dangerous Template’

The Greek political deadlock looked set to continue for a second week as President Karolos Papoulias failed to secure agreement on a unity government. Greece faces a 436 million-euro ($561 million) note coming due for repayment tomorrow. A Greek exit from the euro “is not necessarily fatal, but it is not attractive,” European Central Bank Governing Council member Patrick Honohan said May 12.

German Finance Minister Wolfgang Schaeuble said Europe has done the “utmost” to prop up the financially stricken country, limiting any further room for leniency after about 240 billion euros ($308 billion) of aid pledges. German Chancellor Angela Merkel’s party was defeated in North Rhine-Westphalia two days before data that will show whether the nation slipped into recession.

The exit of Greece from the euro “would remain a dangerous template if other economies continued to weaken,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a report. “Investors would surely fear that a similar outcome was possible and would either shy away from investments or demand an unsustainable risk premium for holding exposure.”

Euro Weakens

The euro depreciated 0.6 percent to $1.2846, and slipped 0.7 percent versus the yen. The Dollar Index, which tracks the U.S. currency against those of six trading partners, advanced 0.4 percent to extend its longest rally since August 2008. The Australian dollar fell below parity with the greenback for the first time this year, with the Swedish krona weakening to 7 per dollar for the first time since Jan. 16.

The yield on the Spanish 10-year bond rose 22 basis points to 6.23 percent. The nation sold 2.9 billion euros of bills maturing in 364 and 518 days, compared with a maximum target of 3 billion euros. Italy’s 10-year yield increased 19 basis points to 5.70 percent as the government auctioned 5.25 billion euros of securities due in 2015, 2020, 2022 and 2025. Germany sold 3.3 billion euros of six-month bills, with Finland and France also auctioning debt today.

Credit-default swaps on Spain climbed 15 basis points to an all-time high of 534.

Commodities Slip

The S&P GSCI (SPGSCI) fell to the lowest since December. Copper futures slid 2.6 percent in New York and gold declined 1.5 percent to $1,561 an ounce, erasing its gain for the year. New York oil futures dropped 1.4 percent to $94.78 a barrel, the lowest front-month settlement since Dec. 19.

Brent crude futures declined 0.8 percent to $111.40 a barrel. Saudi Arabian Oil Minister Ali al-Naimi said yesterday in Adelaide, Australia, that Brent crude, the benchmark price for more than half the world’s oil, should trade at about $100 as crude supply outweighs demand.

Speculators cut bets on a rally in commodities by the most since November. Money managers reduced net-long positions across 18 U.S. futures and options by 19 percent to 723,239 contracts in the week ended May 8, the biggest decline since Nov. 22, Commodity Futures Trading Commission data show. The S&P GSCI Spot Index of 24 raw materials dropped 6.5 percent in eight sessions through May 11, the longest slide since December 2008.

The MSCI Emerging Markets Index dropped 2.1 percent to its lowest level on a closing basis since Jan. 11. The Hang Seng China Enterprises Index (HSCEI) of Chinese stocks listed in Hong Kong fell 1.5 percent, its eighth consecutive decline. The People’s Bank of China said on May 12 it’s cutting the amount of cash that banks must set aside as reserves for a third time since November. Russia’s Micex plunged 3.5 percent and benchmark gauges in Brazil and Poland fell at least 2 percent. India’s Sensex dropped 0.5 percent after inflation unexpectedly quickened in April.

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.