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U.S. Stocks Fall on Concern China May Cut Euro Assets

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(Corrects reported plans of China Investment Corp. in ninth paragraph.)

May 26 (Bloomberg) -- U.S. stocks fell, with the Dow Jones Industrial Average closing below 10,000 for the first time since February, as a report that China may review investments in European government bonds spurred concern the credit crisis will worsen and wiped out an early rally.

Microsoft Corp. tumbled 4.1 percent after Chief Executive Officer Steve Ballmer said the effects of the debt crisis will not be isolated to Europe. Wells Fargo & Co. and Goldman Sachs Group Inc. slid at least 1.6 percent as financial shares in the Standard & Poor’s 500 Index reversed a 1.8 percent rally after the Financial Times said Chinese officials have been meeting with foreign bankers to discuss holdings of European debt.

The S&P 500 lost 0.6 percent to 1,067.95 as of 4 p.m. in New York, erasing a 1.6 percent morning gain triggered by better-than-estimated economic data. The Dow slid 69.3 points, or 0.7 percent, to 9,974.45. The S&P 500 is down 10 percent in May, poised for its worst month since February 2009 as credit-ratings downgrades of Greece, Portugal and Spain added to concern some European nations will struggle to fund deficits.

“The market is fragile,” said Eric Teal, who oversees $4.5 billion as chief investment officer at First Citizens BancShares Inc. in Raleigh, North Carolina. “Europe will continue to weigh on investors’ perception. The U.S. economy is on solid footing as shown by the encouraging data points we’re getting. But there are still too many uncertainties about Europe.”

Gains Erased

Stocks rallied in early trading, with the Dow average jumping more than 135 points, as sales of new homes rose to the highest level in two years and stronger-than-estimated growth in durable-goods orders bolstered confidence the economic recovery is strengthening.

Benchmark indexes erased their advance in the final hour of trading as the euro extended declines to trade below $1.22, approaching a four-year low of $1.2144 reached last week. Federal Reserve Bank of Richmond President Jeffrey Lacker said Europe’s sovereign debt crisis may reduce U.S. economic growth by as much as 0.2 percentage point.

The “euro has been trading terribly,” Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, said in an e-mail. “Once euro broke the 1.22 level, selling picked up in everything else.”

China’s Review

China’s State Administration of Foreign Exchange has met with foreign bankers because of concern about exposure to Europe, the Financial Times reported without saying where it got the information.

Gao Xiqing, the head of China Investment Corp., said he plans to keep investments in Europe even after the euro’s decline, Reuters said in a report. The fund had debated whether to lower the percentage of assets it allocates toward the continent, Reuters cited Gao as saying.

The S&P 500 has moved 11.5 points, or 1.1 percent, on average during the last hour of the past five sessions.

The S&P 500 yesterday erased losses in the final minutes of trading yesterday, wiping out a 3.1 percent drop. The index briefly sank below 1,050 and its 2010 low in February of 1,044 before recovering yesterday. The levels are watched by traders and analysts who make investment decisions based on charts.

The Chicago Board Options Exchange Volatility Index, the benchmark gauge of options prices known as the VIX, rose 1.2 percent to 35.02 today after retreating 24 percent over the previous three sessions. The VIX has jumped 57 percent in May, poised for its biggest monthly increase since Lehman Brothers Inc.’s bankruptcy in September 2008, on demand for options to protect against further losses in stocks. Options convey the right to buy or sell shares at a set price by a set date.

‘Ripple Impact’

“Volatility’s here to stay,” said Matthew DiFilippo, director of research at Stewart Capital Advisors LLC in Indiana, Pennsylvania, which manages $1 billion. “People are nauseous about the markets and they’re their de-risking.”

Microsoft had the biggest decline in the Dow, slumping 4.1 percent to $25.01. Ballmer told reporters in Singapore that he’s concerned about Europe contagion.

“Any problems that we see in Greece or any other country in Europe will not be isolated to Europe and have a ripple impact, just the way the sub-prime crisis had a ripple impact,” he said.

Apple Inc., the computer maker turned mobile gadget maker, overtook Microsoft to become the most valuable technology company on optimism the company will keep adding customers for its iPhone, Macintosh computer and iPad. Apple shares slipped 0.5 percent to $244.11 after rallying as much as 2.8 percent.

Apple Tops Microsoft

Apple’s market value rose to $222.1 billion, surpassing Microsoft’s $219.2 billion at the close of trading. That makes Apple the most valuable technology firm in the world. It’s also the second-largest U.S. stock by market value, behind oil company Exxon Mobil Corp., valued at $278.6 billion.

Goldman Sachs, the most-profitable firm in Wall Street history, slumped 1.6 percent to $140.30. Wells Fargo, the largest U.S. home lender, tumbled 3 percent to $28.04.

Monsanto Co., the world’s largest seed company, fell 3.5 percent to $52.66 after its share-price estimate was cut to $59 from $75 at Soleil Securities Corp.

The S&P 500, which is down 4.3 percent in 2010, may continue to retreat before bottoming in the next 5 to 10 trading days, according to technical analysts at UBS AG.

“The final overshooting in the S&P 500 is under way,” Zurich-based analysts Michael Riesner and Marc Mueller wrote in a report today. “We recommend that aggressive traders watch out for a convincing key reversal between 1,060 and 1,000 as evidence that the market has bottomed and therefore as a reliable tactical buying trigger.”

‘Bottoming Process’

Unless the index closes above the 1,090 level, which would be a “strong signal that the market has either seen its low or has at least started with a larger bottoming process,” the S&P 500 may continue its decline toward 1,000, the analysts wrote.

Earlier gains in stocks came after the Commerce Department said orders for durable goods rose in April for the fourth time in five months. The 2.9 percent increase in bookings for goods meant to last at least three years was the biggest in three months. Orders excluding transportation unexpectedly fell after revisions showed even bigger increases in prior months.

Industrial companies posted the only gain among 10 groups in the S&P 500, rising 0.3 percent collectively. General Electric Co. rose 0.4 percent to $16.01 and Boeing Co. advanced 0.8 percent to $63.26.

Homebuilders Gain

A gauge of 12 homebuilders across S&P indexes closed up 0.3 percent after rallying as much as 4.6 percent. New-home sales increased 15 percent to an annual pace of 504,000 last month, the highest level since May 2008, the Commerce Department said.

Toll Brothers Inc. advanced as much as 6.4 percent before paring gains as the market headed lower, closing up 0.8 percent at $20.78. The largest U.S. luxury homebuilder increased its land holdings for the first time in four years in anticipation of a recovery in the market. The number of houses under contract but not yet sold rose in the three months ended April 30 for the first time on a year-over-year basis since 2006.

The U.S. economy will grow 3.2 percent in 2010 and next year instead of the 2.5 percent predicted in November, and the euro region will advance 1.2 percent compared with the previous forecast of 0.9 percent, the Organization for Economic Cooperation and Development said today in a report.

“The economic data are consistently pointing toward a V-shaped recovery, which is very supportive for equities and credit,” said Thomas Sowanick, co-president of Omnivest Group LLC, which manages $1 billion in Princeton, New Jersey.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Esmé E. Deprez in New York at edeprez@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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