Stocks, Treasuries Slide on U.S. Debt Concern; Dollar Rallies

Stocks, Commodities, Treasuries Slide on Default Concern
Specialist Michael Pistillo, left, calls out prices as he works at his post on the floor of the New York Stock Exchange July 27, 2011. Photographer: Richard Drew/AP

Stocks sank, dragging the Standard & Poor’s 500 Index down the most in almost two months, and Treasuries and commodities slid as a stalemate over the debt ceiling pushed the U.S. closer to default. The dollar rallied.

The S&P 500 lost 2 percent to 1,304.89 at 4 p.m. in New York for its biggest slide since June 1. The cost of insuring against a U.S. default climbed to the highest level since February 2010 and 10-year Treasury note yields increased two basis points to 2.98 percent. Coffee and oil lost more than 1.5 percent and gold erased earlier gains to drag the S&P GSCI Index down 0.9 percent. The Dollar Index rose 0.9 percent.

The dispute over plans to cut the U.S. federal deficit has stolen investor attention away from an earnings season that has produced higher-than-estimated results at about 81 percent of S&P 500 companies that reported so far. Shares of industrial companies helped lead declines today after a Commerce Department report showed durable goods orders fell 2.1 percent.

“It’s a tug of war between the headline risk of the debt ceiling issue and earnings,” Matthew DiFilippo, who helps manage $1 billion as director of research at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said in telephone interview. “The volatility may create buying opportunities because corporate earnings are coming in strong."

Retreat This Week

The S&P 500 has lost almost 3 percent this week as lawmakers moved no closer to reaching a debt agreement before an Aug. 2 deadline. Corning Inc. slid 7.2 percent today after cutting its forecast for global glass demand. Juniper Networks Inc. plunged 21 percent as the second-biggest maker of Internet networking equipment posted earnings that missed forecasts. Inc., the world’s largest online retailer, jumped 3.9 percent after sales and profit beat analysts’ estimates.

U.S. equity index futures extended losses before the start of trading after the decrease in durable-goods orders defied economists’ median forecast for an increase of 0.3 percent. The Federal Reserve said the economy grew at a slower pace in more parts of the country since the beginning of June as shoppers restrained spending and factory production eased.

‘‘Economic activity continued to grow,” the Fed said in its Beige Book survey released today in Washington. “However, the pace has moderated in many districts.” Growth slowed in eight of the Fed’s 12 regions, compared with four in the last survey, the central bank said.

Brazil’s Bovespa index dropped 1.7 percent, extending its drop from its bull-market peak in November to more than the 20 percent threshold that marks a bear market. Canada’s S&P/TSX Composite Index sank 2 percent.

Default Swaps

Credit-default swaps on the U.S. rose for a third day, climbing four basis points to 62, according to CMA. The swaps are the most-expensive since Feb. 8, 2010. Still, they are cheaper than swaps on 53 of 58 countries tracked by data provider CMA. Only swaps on Finland, the Netherlands, Norway, Sweden and Australia cost less, according to CMA data. Swaps on Greece are at 1,697 basis points and Ireland are at 845.

Rates are climbing on Treasury bills set to mature just after the deadline for when the U.S. will exhaust its ability to borrow, signaling investors are growing more concerned that lawmakers will fail to reach an agreement. Rates on six-month bills due Aug. 4 climbed 10 basis points today to 0.15 percent, the highest since February.

Senate Majority Leader Harry Reid said it’s time for Republicans to “face facts” and agree on a compromise to raise the debt ceiling. At a news conference today in Washington with other Senate Democratic leaders, Reid said his plan to trim spending over 10 years is the only one with “true compromise.” Boehner’s reworked plan gained support today among fellow Republicans less than a week from an Aug. 2 deadline to raise the $14.3 trillion borrowing limit.

’Massive Consequences’

The U.S. faces “massive consequences” if the nation defaults, Pacific Investment Management Co.’s Mohamed El-Erian said. The world’s largest economy would experience “headwinds” to growth and employment, already in a crisis, El-Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“If the U.S. defaults, there would be massive consequences,” El-Erian said today from Pimco’s headquarters in Newport Beach, California. “People are concerned, but they sort of think it’s a very, very low probability, and we would agree.”

European Stocks

European stocks also slumped for a third day as the region deals with its own government debt crisis. More than seven stocks fell for every one that gained in the Stoxx Europe 600 Index, which lost 1.1 percent. Banco Santander SA, Spain’s biggest lender, slumped 3.2 percent after second-quarter profit dropped 38 percent as domestic loan provisions rose. UniCredit SpA, Italy’s largest lender, slid 4.3 percent.

PSA Peugeot Citroen tumbled 7.6 percent as Europe’s second-biggest carmaker said its automotive unit may post a loss in the second half. Clariant AG sank 14 percent after the Swiss chemical maker reported profit that missed analysts’ estimates.

The yield on 10-year Italian bonds jumped 14 basis points to 5.74 percent. Greek yields climbed four basis points to 14.75 percent. Greece will partially default on its debt once European officials push through a plan that will see bondholders foot part of the bill of a second bailout agreed to last week in Brussels, S&P said. The rating company also cut Greece to CC, two steps above default, from CCC, according to a statement today. The outlook on the debt is negative.

‘Uncontrolled’ Exit

Europe must prevent a breakup of the euro region and an “uncontrolled” exit of one of its members, German Finance Minister Wolfgang Schaeuble said in a letter to lawmakers. Schaeuble said Germany’s government is against a “blank check” for the euro-area rescue fund to purchase bonds on the secondary market. The Markit iTraxx SovX Western Europe Index of credit-default swaps insuring the debt of 15 governments rose 6.7 basis points to a mid-price of 266.7, according to CMA.

The 17-nation euro depreciated 1 percent to $1.4373, snapping a two-day gain, while losing 0.8 percent against the yen and 0.9 percent versus the Swiss franc. The Australian dollar strengthened as much as 1.1 percent against the U.S. currency to $1.1081, the most since it was floated in 1983, after a report showed consumer prices rose more in the second quarter than economists predicted. New Zealand’s dollar also climbed versus the U.S. currency to the highest level since it was freely floated in 1985 after a survey showed business confidence improved in July.

Oil slid 2 percent to $97.58 a barrel in New York, extending losses after a U.S. government report showed an unexpected increase in inventories.

The MSCI Emerging Markets Index slipped 0.7 percent. China’s Shanghai Composite Index climbed for a second day, rising 0.8 percent after profit growth accelerated at industrial companies.

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