Stocks, Euro, Spain Bonds Drop on Debt Concern; Treasuries Rise

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Stocks Fall, Euro Drops on Crisis Concerns
Riot police clash with students protesting against economic measures on public school budgets on November 25, 2010 in Bologna, Italy. Photographer: Roberto Serra/Iguana Press/Getty Images

Stocks sank the most since March while Spanish 10-year bond yields topped 6 percent for the first time since 1997 amid concern Europe’s debt crisis will spread. The euro tumbled, while U.S. Treasuries rallied.

The MSCI All-Country World Index of shares in 45 nations tumbled 2.1 percent, the most in four months, as of 5 p.m. in New York. The Markit iTraxx SovX Western Europe Index of default swaps jumped to an all-time high as Italy’s stock index tumbled to the lowest level in two years. The euro sank 1.7 percent to $1.4029 and reached the weakest price since May. Oil fell 1.1 percent while yields on 10-year Treasuries posted the biggest two-day drop in more than a year.

European finance chiefs clashed over how to dig Greece out of its financial hole just as markets battered the bonds of Spain and Italy, opening a new front in the debt crisis. Alcoa Inc. began the second-quarter earnings season, reporting after U.S. markets closed that profit more than doubled. President Barack Obama said he won’t agree to a short-term extension of the government’s debt limit and plans to continue meeting with members of Congress every day until an agreement is reached.

“The size of Italy’s economy makes sovereign credit issues there a much greater concern,” said Gary Flam, who helps oversee $6.5 billion at Bel Air Investment Advisors. “Greece, Portugal and Ireland are manageable given the small size of those economies relative to the EU. Once you cross the threshold into Spain and Italy, you’re taking a big step up. That’s a major negative.”

S&P 500 Retreat

The Standard & Poor’s 500 Index retreated 1.8 percent after advancing 5.9 percent between June 24 and July 8, the biggest two-week rally since October 2009. The index lost 0.7 percent July 8 after American employers added 83 percent fewer jobs in June than economists forecast. U.S. equities have rebounded after the S&P 500 lost 3.2 percent in May and June.

Alcoa slipped 2.9 percent in regular trading before reporting earnings, becoming to first Dow Jones Industrial Average company to do so for the second quarter. Earnings excluding items were 32 cents a share, missing the 33-cent average estimate of 14 analysts surveyed by Bloomberg. Sales increased 27 percent to $6.59 billion, exceeding the average estimate of $6.31 billion from seven analysts.

Alcoa shares slipped to $15.82 at 5:48 p.m. in New York after closing at $15.91.

Profits at companies in the S&P 500 will rise 13 percent in the second quarter, according to analyst estimates compiled by Bloomberg, the smallest gain in two years.

Biggest Losses

Financial, raw-materials and energy companies led losses among all 10 industry groups in the S&P 500, with Citigroup Inc. losing 5.3 percent, JPMorgan Chase & Co. down 3.2 percent and Exxon Mobil Corp. 0.6 percent lower. Companies reliant on economic growth have tumbled in the last two days after rallying during the past three weeks.

News Corp. slid 7.6 percent, the biggest drop in the S&P 500, to $15.48. The media company’s 7.8 billion-pound ($12.4 billion) bid for pay-TV operator British Sky Broadcasting Group Plc faces a review by the top U.K. competition authority that will take at least six months as a probe into phone hacking widens.

The 10-year U.S. Treasury yield dropped 10 basis points to less than 3 percent for the first time since June 28. The yields have dropped 21.9 basis points over the past two days.

The euro weakened 1.7 percent to a near a record low versus the Swiss franc. The dollar rallied versus 14 of 16 major peers, climbing the most against the Swedish krona, Norwegian krone and South African rand.

Oil, Cotton

Crude oil in New York fell 1.1 percent to $95.15 a barrel and copper dropped 1.4 percent in New York. The S&P GSCI index of 24 commodities retreated 0.8 percent, led by a 4.4 percent decline in cotton. Orange juice lost as much as 2.4 percent, its biggest decline since March 21. Gold rose to a two-week high, advancing 0.8 percent to $1,554 an ounce.

President Obama held a press conference in Washington today, his fifth public remarks on debt in a week, as he urged Republican leaders to compromise on their opposition to tax increases and achieve “the largest possible deal” to cut the deficit. Obama resumed talks this afternoon with bipartisan congressional leaders toward a compromise on reducing deficits and raising the $14.3 trillion federal debt ceiling before the government exhausts its borrowing authority on Aug. 2.

The extra yield investors demand to hold Italian and Spanish 10-year bonds instead of German bonds rose to the highest since the euro was introduced in 1999.

Italy, Greece

Credit-default swaps protecting Italian bonds rose 55 basis points to an all-time high of 301, while contracts on Spain jumped 28 basis points. The yield on Italy’s 10-year bond climbed 41 basis points to 5.68 percent, the highest in more than a decade. Yields on Spain’s 2-year bond increased 43 basis points to 4.14 percent. Greek yields jumped 76 basis points to 29.72 percent, and its default swaps climbed 143 basis points.

“Both Italy and Spain are starting to look more vulnerable,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “The fear is that this is going to continue as the market starts focusing on the larger euro-region nations.”

The yield on 10-year German bonds declined 16 basis points to 2.67 percent.

European leaders are prepared to accept that Greece should default on some of its bonds as part of a new bailout plan for the country that would put its debt levels on a sustainable footing, the Financial Times reported, citing unidentified senior officials. The European Central Bank is seeking advice from a private lender on what to do in the event of a default in the euro area, Handelsblatt said, without citing anyone.

End the Uncertainty

The EU has “got to put an end to the uncertainty surrounding Greece and the contagion impact that that is having,” Andrew Bosomworth, a fund manager at Pacific Investment Management Co., which runs the world’s biggest bond fund, said in an interview with Owen Thomas and Francine Lacqua on Bloomberg Television’s “Countdown.”

The Stoxx Europe 600 Index fell 1.4 percent. Ageas, the insurer formerly known as Fortis, and EFG Eurobank Ergasias SA, Greece’s second-biggest bank, led losses among financial shares, sliding more than 7.9 percent. Italian stocks fell to the lowest level in two years, with declines in lenders UniCredit SpA and Banca Sanpaolo Intesa SpA helping to push the benchmark FTSE MIB index down 4 percent.

The MSCI Emerging Markets Index dropped 1.8 percent, its biggest decline in three weeks. The Hang Seng China Enterprises Index retreated 2 percent, while Russia’s Micex Index sank 1.3 percent and India’s Bombay Stock Exchange Sensitive Index slipped 0.7 percent. Turkey’s lira weakened 1.2 percent against the dollar after data showed the current-account deficit more than doubled in May from a year earlier.

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