Stocks, Oil Drop on Debt Concern; Gold in Longest Run Since 1980

Stocks, Euro Fall Debt Crisis; Gold Longest Run Since 1980
Gold had its longest winning streak since 1980. Photographer: Chris Ratcliffe/Bloomberg

Stocks fell around the world, extending last week’s drop, and oil declined amid concern officials are no closer to solving the debt crises in Europe and the U.S. Gold extended its longest rally since 1980.

The Standard & Poor’s 500 Index lost 0.8 percent to 1,305.44 at 4 p.m. in New York and the Stoxx Europe 600 Index sank 1.8 percent, extending its slide from its 2011 high to almost 10 percent. The euro recovered losses after reaching an all-time low versus the Swiss franc, while costs to insure European sovereign debt climbed to a record. Gold topped $1,600 an ounce for the first time. Italy’s 10-year bond yield rose 20 basis points and Spain’s surged 25 points. Oil fell 1.4 percent.

A gauge of European bank shares slumped to a two-year low and financial stocks led losses in the S&P 500 as concern about Europe’s debt crisis grew. President Barack Obama is trying to get lawmakers to agree to a deficit-cutting deal as the Aug. 2 deadline for raising the debt ceiling nears. Goldman Sachs Group Inc. cut its forecasts for U.S. economic growth after reports last week showed consumer confidence deteriorated and New York-area manufacturing unexpectedly shrank.

“Anything that adds to the cloudiness of the future makes it more difficult to invest,” said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages about $161 billion.

Earnings Season

The S&P 500 extended last week’s 2.1 percent slide and fell below its lowest closing level since June 28 as all of its 10 main industry groups retreated. Bank of America Corp., Boeing Co., Travelers Cos. and Alcoa Inc. tumbled at least 2 percent to lead losses in 29 of 30 stocks in the Dow Jones Industrial Average. News Corp. slumped 4.3 percent after two people familiar with the matter said independent directors are questioning whether a leadership change is needed following a phone-hacking scandal.

Halliburton Co. was little changed after the world’s second-biggest oilfield-services provider reported profit jumped 54 percent. . More than 100 other S&P 500 companies will post earnings this week, including Goldman Sachs, Coca-Cola Co. and Apple Inc.

Ray Dalio of Bridgewater Associates LP said he expects “another very difficult period” for financial markets next year or in early 2013 as governments struggle to reduce their debt, the New Yorker reported, citing an interview with the founder of the world’s biggest hedge fund by assets. The U.S. will eventually print more money to devalue its currency, which would hurt its bond markets, Dalio said, according to the New Yorker. Countries in the euro zone don’t have that option and will undergo “classic depressions,” he told the magazine.

Treasury Demand

The yield on the 10-year Treasury note rose less than one basis point to 2.92 percent after decreasing four points earlier. Two-year Treasury yields were little changed at 0.36 percent.

Global demand for U.S. stocks, bonds and other financial assets rose in May from a month earlier as China and Japan added to their holdings of government securities, the Treasury Department reported. Net buying of long-term equities, notes and bonds totaled $23.6 billion during the month, compared with $30.6 billion in April. Including short-term securities such as stock swaps, foreigners sold a net $67.5 billion compared with net buying of $66.6 billion the previous month.

The Treasury’s reporting on long-term securities is a gauge of confidence in U.S. economic policy, and today’s report suggests America continues to offer safety from the economic crisis in Europe even with the White House and Congress at odds over raising the Treasury’s borrowing authority.

Growth Forecasts

Goldman Sachs Chief Economist Jan Hatzius cut his forecast for U.S. economic growth to 1.5 percent in the second quarter and 2.5 percent in the third quarter, down from 2 percent and 3.25 percent respectively. Hatzius, in a report received after markets closed on July 15, cited lower-than-estimated economic data including a drop in the Thomson Reuters/University of Michigan consumer sentiment index to “territory normally associated with recession.” The gauge decreased in July to 63.8, the weakest level since March 2009.

U.S. equities have been under pressure amid growing concern American lawmakers will fail to reach an agreement to raise the nation’s $14.3 trillion debt limit. A default by the U.S. would cause more panic than the collapse of Lehman Brothers Holdings Inc. in 2008, former Treasury Secretary Larry Summers told CNN in an interview broadcast yesterday. Lehman Brothers’s bankruptcy prompted the biggest collapse of global financial markets since the Great Depression, driving the S&P 500 down 46 percent between September 2008 and March 2009.

Deficit Feud

House Speaker John Boehner, a Republican from Ohio, said his party wouldn’t accept any tax increases as he worked on a deal to lower the deficit. Obama is pushing to close tax loopholes for the richest Americans and corporations and cut discretionary spending by the government.

Among European bank stocks, Intesa Sanpaolo SpA, Italy’s second-biggest bank, dropped 6.5 percent, Germany’s Commerzbank AG slid 4.6 percent, and France’s Societe Generale SA sank 5.5 percent. European leaders are holding a special summit this week as they seek to contain the debt crisis, after eight of the region’s banks failed stress tests. European Central Bank President Jean-Claude Trichet reiterated the ECB won’t accept bonds from a defaulting nation as collateral.

“The problems in Europe are a reminder that they haven’t gone away and they can flare up,” said Jordan Irving, who helps oversee $150 million as managing director at Irving Magee Investment Management LLC in Philadelphia. “If European banks are in trouble, you know U.S. banks also have exposure to the same problems over there. The concern is how much exposure do the U.S. banks really have to the European problems.”


The VStoxx Index, a measure of the cost of insuring against losses in the Euro Stoxx 50 Index, rose 10 percent to 31, the highest closing level in four months. The Chicago Board Options Exchange Volatility Index, which is known as the Vix and tracks the cost of using options to protect against declines in the S&P 500, jumped 7.3 percent to an almost one-month high of 20.95.

Gold for August delivery climbed for a 10th day, rising 0.8 percent to $1,602.40 an ounce, and gold for immediate delivery increased for an 11th day. September silver gained for a fourth day, climbing 3.3 percent to $40.342, the highest settlement price since May 3.

Gold Streak

The last time gold rallied this many straight days was when the U.S. was in the final month of a recession in July 1980, according to the National Bureau of Economic Research, and inflation was at 13.1 percent, according to data compiled by Bloomberg. Rising consumer prices have prompted at least two dozen nations and the European Central Bank to raise interest rates this year. The metal touched a then-record $850 in January 1980.

Metals accounted for the only six gains among the 24 commodities tracked by the S&P GSCI Index, which sank 0.9 percent. Oil for August delivery slipped 1.4 percent to $95.93 a barrel in New York. Cotton and coffee fell more than 2.1 percent for the biggest declines.

The euro weakened 0.4 percent to $1.4105 and depreciated 0.5 percent against the yen to snap a three-day gain. The dollar was up against 13 of 16 counterparts, rising more than 1.1 percent against the South African rand and Swedish krona.

The extra yield investors demand to hold Italian 10-year bonds instead of benchmark German bunds rose 26 basis points to 332 basis points, or 3.32 percentage points. The Spanish-German spread increased 29 basis points to 367. Yields on Portuguese and Greek notes also surged.

Credit-default swaps on Greece, Ireland, Italy, Portugal and France rose to records, helping drive the Markit iTraxx SovX Western Europe Index of 15 governments 10.1 basis points higher to 307.65 basis points.

Eastern Europe

The Markit iTraxx SovX CEEMEA Index of eastern European, Middle East and Africa credit-default swaps jumped 3.6 basis points to 214.04. The risk of euro-area contagion is rising for eastern Europe, Morgan Stanley said, recommending underweight positions in central and eastern European currencies relative to other emerging markets.

The BUX Index fell 3.7 percent in Budapest and the forint weakened against all 16 major peers, reaching a record low against the franc. Sixty-three percent of Hungarian household mortgages were denominated in foreign currencies as of April 30, with over 100,000 mortgages overdue, according to central bank data.

Poland’s WIG20 Index slid 2.6 percent. Franc-denominated home loans represent 53 percent of all mortgages outstanding, according to the financial market regulator’s website.

Download: Chatwell Says Gold Benefiting As Safe Haven


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