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Stocks Plunge as Treasuries, Gold Rally on Europe Debt Concern

Stocks slid, dragging the Dow Jones Industrial Average to the lowest level since September 2010, and Treasuries rose for a third day amid concern the European sovereign debt crisis is worsening. The dollar climbed versus 13 of 16 major peers, with the euro losing 1.3 percent to $1.4190. Gold futures surged to a record above $1,800 an ounce.

The Dow sank 519.83 points, or 4.6 percent, to 10,719.94 at the 4 p.m. close in New York. The Standard & Poor’s 500 Index fell 4.4 percent to 1,120.76 following its biggest jump in more than two years yesterday, when it rebounded from its worst loss since 2008. The Stoxx Europe 600 Index plunged 3.8 percent as Societe Generale SA slid 15 percent. Ten-year Treasury yields, which touched an all-time low yesterday, fell 16 basis points to 2.09 percent after an auction drew a record-low yield. Costs to protect French debt reached a record.

Central banks are fighting to prevent a recession as equities echo the bear market in 2008-2009, with Federal Reserve Chairman Ben S. Bernanke vowing yesterday to keep borrowing costs at an all-time low to revive a recovery that’s “considerably slower” than expected. People familiar with the transactions said the European Central Bank bought Italian and Spanish bonds to help reduce borrowing costs. Switzerland’s central bank said today it will “significantly” increase the supply of liquidity to banks.

‘Spiral Down’

“It’s a spiral down until it stops,” Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, which manages $1.2 billion, said in a telephone interview. “We’re going through these constant day-to-day battles over Europe’s debt crisis, a downgrade in the U.S. and a weakening economy. There’s no positive sentiment regarding a light at the end of the tunnel.”

Walt Disney Co. slid 9.1 percent, the most since Dec. 1, 2008, on concern that slowing consumer spending and rising costs at the ESPN sports network may crimp profit growth. The stock helped lead declines in all 30 companies in the Dow, which had the ninth-worst point drop in its 115 year history. Financial shares fell the most among 10 groups today, with Goldman Sachs Group Inc. and Citigroup Inc. dropping more than 10 percent. The S&P 500 Financials Index slumped 7.1 percent today and has plunged 29 percent from its 2011 high in February.

Bank of America Corp. lost 11 percent even after Chief Executive Officer Brian T. Moynihan said the lender will meet its capital targets, buoyed by conditions that are better than they’ve been since the credit crisis.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told CNBC that he’s very optimistic in the long run and the fundamental strength of the economy is “still here.” His bank’s shares fell 5.6 percent.

‘Blow Your Socks Off’

“The strength of the system is going to blow your socks off when it comes out of this malaise,” Dimon told the cable-television network while touring his branch network in California. “This will pass too. I don’t know when, three months, six months, nine months or a year, but it will pass.”

The S&P 500 wiped out most of a 4.7 percent gain from yesterday, a rebound that followed a 6.7 percent slide on Aug. 8 when markets opened following the reduction in the U.S. credit rating to AA+ from AAA at S&P. Yesterday’s rally was triggered by the Fed’s announcement that it plans to keep its benchmark rate at a record low through mid-2013 as it considers other tools to bolster economic growth.

“The markets are going through massive volatility and it’s not surprising because we are in uncharted water, for the economy and for policies, and therefore for markets,” Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., the world’s biggest manager of bond funds, said in a Bloomberg Television interview. “So sentiment is a big issue and you get these massive moves.”

$3 Trillion Rout

The S&P 500 has slumped 18 percent from a three-year high at the end of April, threatening to join Europe’s benchmark index with a bear market slide of more than 20 percent. The losses followed weakening economic data and a political impasse in Washington that brought the government to the brink of default before the debt ceiling was raised on Aug. 2. About $3 trillion in U.S. market value, and $8 trillion globally, was erased between July 22 and Aug. 8, according to data compiled by Bloomberg.

The S&P 500 is trading for about 12.3 times its companies’ earnings from the past year, a valuation not seen before this week since the first month of the bull market in March 2009, according to data compiled by Bloomberg.

David Kostin, New York-based equity strategist at Goldman Sachs, said the multiple may remain depressed in the short-term because of concern that the economy will relapse into a recession.

‘Elevated Uncertainty’

“We see S&P 500 valuation as attractive for long-term investors given a large discount to fundamentals but do not expect the discount to close in the near term due to rising recession risk and elevated uncertainty in macroeconomic and political conditions, earnings views, and the path for interest rates,” Kostin wrote in a note dated yesterday.

Canada’s S&P/TSX Composite Index gained 0.7 percent today as gold producers surged the most since February 2010 and energy companies advanced amid a rebound in oil. Energy and raw-materials companies make up 48 percent of Canadian stocks by market value. The gap of 5.2 percentage points between the performance of the S&P/TSX and S&P 500 today was the biggest since the day known as Black Monday in October 1987 when the U.S. index plunged 20 percent, not including days after one of the markets was closed.

Record-Low Yields

Two-year Treasury yields slipped two basis points to 0.18 percent, compared with yesterday’s intraday record low of 0.16 percent. The yield difference between two- and 10-year Treasuries was 192 basis points, the narrowest since April 2009, underscoring concern about the pace of the economic recovery. Treasuries extended gains today after $24 billion in 10-year securities drew a record low yield of 2.14 percent in the first offering of the maturity following S&P’s downgrade of U.S. credit. The existing 10-year yield reached a record low of 2.03 yesterday.

The rally in bonds and slump in stocks has driven the 2.28 percent dividend yield of S&P 500 companies above the yield of 10-year Treasury bonds for the first time since May 2009, according to data compiled by Bloomberg.

About eight stocks fell for each that gained in the Stoxx 600. Intesa Sanpaolo, the Italian lender, and French bank BNP Paribas lost more than 9 percent. France’s CAC-40 Index sank 5.5 percent, the most since December 2008, to the lowest level since July 2009. The FTSE-MIB Index in Italy plunged 6.7 percent for its biggest drop since October 2008.

French Default Swaps

The cost to insure French government debt against default rose to a record 175 basis points. France’s top credit grade was affirmed by S&P, Moody’s Investors Service and Fitch Ratings amid concern that Europe’s sovereign debt crisis is intensifying.

The outlook on France is stable and its AAA ranking is “warranted,” Moritz Kraemer, S&P’s managing director of European sovereign ratings, said today in a Bloomberg Television interview. Francesco Meucci, a spokesman for Moody’s Investors Service, said in a telephone interview the country’s Aaa grade is “stable” and Fitch Ratings spokesman Brian Bertsch said France is rated AAA with stable outlook as per its May 31 statement.

“If credit default swaps on France are under attack that’s not a good sign,” said Yves Marcais, a sales trader at Global Equities in Paris. “That means that France is under attack and that’s worrisome. French banks hold a lot of French bonds.”

‘Categorically Denies’

Societe Generale “categorically denies all market rumors,” Emmanuelle Renaudat, a spokeswoman for the French bank said after the company’s shares declined as much as 23 percent today. The lender’s performance in July and early August shows it will be able to post “solid” results in the future, the bank said in a statement after the market closed today. The bank asked France’s market watchdog to open a probe into the origin of speculation that “gravely hurt the interests of shareholders.”

France’s market regulator, the Autorite des Marches Financiers, said it’s watching financial shares “in particular” after bank stocks in the European Union dropped to their lowest since March 2009.

The Spanish 10-year yield fell five basis points to 5.03 percent and Italian yields decreased eight points to 5.10 percent. Italy sold 6.5 billion euros ($9.4 billion) of 366-day bills, with the average yield at 2.959 percent, compared with a yield of 3.67 percent at the previous sale on July 12.

Swiss Central Bank Moves

The Swiss franc weakened more than 0.7 percent against the yen and dollar, while strengthening against 11 of its 16 major peers. The Swiss National Bank said today it boosted the supply of liquidity to banks by expanding sight deposits to 120 billion francs ($165 billion) from 80 billion francs. It will also conduct foreign-exchange swap transactions, a tool last used in 2008. The central bank said it’s ready to take further measures if needed.

The S&P GSCI index of 24 commodities rose for the first time this week, climbing 2.5 percent for its biggest gain in a month. Oil rose 4.5 percent to $82.89 a barrel, rebounding from a 10-month low with the biggest gain in three months, following an unexpected decline in supplies.

Gold futures settled up 2.4 percent at $1,784.30 an ounce after jumping as much as 3.3 percent to $1,801 an ounce. Commodities may outperform equities the rest of the year because of record demand and shortages, according to Barclays Capital.

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