U.S. Stocks Drop Amid Concern Over Economic Slowdown; Yen Rises

Stocks, U.S. Futures Pare Losses
A trader works on the floor of the New York Stock Exchange in New York. Photographer: Paul Taggart/Bloomberg

U.S. stocks fell, capping a fourth straight weekly slump for the Standard & Poor’s 500 Index, as the cheapest price-earnings ratios since 2009 failed to lure investors amid concern the global economy is weakening. The yen touched a post-World War II high against the dollar.

The S&P 500 dropped 1.5 percent to 1,123.53 at 4 p.m. in New York, after rising as much as 1.2 percent. The Stoxx Europe 600 Index fell 1.6 percent to its lowest close since July 2009. The Japanese yen reached 75.95 per dollar, its strongest postwar level as investors sought refuge in the currency. Oil slid 0.1 percent as it swung from gains to losses. Gold futures topped $1,880 an ounce for the first time. Ten-year Treasury yields rose less than one basis point after yesterday’s record low.

Citigroup Inc. and JPMorgan Chase & Co. lowered their growth forecasts for the U.S. economy. German Chancellor Angela Merkel stepped up her rejection of jointly issued euro-area bonds, following speculation the European Union will start joint bond sales. Technology stocks in the S&P 500 retreated 2.8 percent, the most among a group of 10 in the index, as Hewlett-Packard Co. slumped 20 percent, its biggest drop since 1987 on a closing basis.

“The market is trading off of really primal fear,” Peter Kenny, a managing director in institutional sales at Knight Capital Group Inc. in Jersey City, New Jersey. “There’s fear that Europe represents a risk to the global markets, there’s fear of a recession. This is a very policy-driven approach to pricing amid a lack of enthusiasm on the part of the Europeans, specifically the Germans, not willing to assume any more risk. The reason that the market is not selling off more broadly today goes back to the sense that valuations beg for attention.”

Bear Markets

The S&P 500 has fallen 18 percent from an almost three-year high on April 29 amid concern about Europe’s debt crisis and a global economic slowdown. The decline through Aug. 8 drove the index to a valuation of 12.2 times reported earnings, the lowest level since March 2009. Its price-earnings ratio is 12.3, compared with the average of 16.4 since 1954, according to data compiled by Bloomberg. The benchmark for U.S. equities lost 4.7 percent this week.

Global stocks fell today, extending the week’s slump in the MSCI All-Country World Index to 3.9 percent, as Citigroup cut its U.S. gross domestic product growth estimate to 1.6 percent in 2011 from 1.7 percent, and lowered its forecast for 2012 to 2.1 percent from 2.7 percent. JPMorgan said GDP will grow 1 percent in the fourth quarter rather than the 2.5 percent previously forecast and 0.5 percent in the first quarter of 2012 instead of 1.5 percent. Citigroup also reduced its earnings estimates for S&P 500 companies for this year and next.

Euro Bonds

Stock futures pared early losses amid optimism European Union regulators may push for joint bond sales by euro-area nations to help contain the debt crisis, putting pressure on Germany to drop its opposition. The European Commission said it may present draft legislation on euro bonds when completing a report on the feasibility of common debt sales. The commission, the EU’s regulatory arm in Brussels, opposed such a step earlier this year because of Germany.

German Chancellor Merkel rejected the idea of jointly issued euro-area bonds, saying that a “collectivization” of the region’s debt would leave euro members worse off. “We don’t want that,” Merkel told members of her Christian Democratic Union today in Hameln, Germany.

Hewlett-Packard tumbled 20 percent after missing analysts’ forecasts and announcing strategic changes that will take at least a year to execute. Financial shares in the S&P 500 dropped 1.9 percent, the second-biggest decline among 10 industries behind technology. Citigroup retreated 4.3 percent to $26.77. JPMorgan fell 2.4 percent to $34.35.

Moving in Lockstep

Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market’s biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 yesterday, using 60 days of data, according to MF Global.

The increase shows investors are ignoring the merits of individual stocks and instead reacting to news about the economy, said Craig Peskin, co-head of technical analysis at the New York-based securities firm. High correlation “is usually the case in a bear market, when investors are liquidating equities as an asset class,” he wrote in an e-mail yesterday. “In a bull market, when investors are differentiating, we see low or falling correlation.”

Rising Yen

Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global data. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.

The yen rallied to the strongest level since World War II versus the dollar as the U.S. economic slowdown and Europe’s debt crisis stoked concern global growth is slumping, bolstering the refuge appeal of Japan’s currency.

Japanese Finance Minister Yoshihiko Noda signaled he’s ready to do another “surprise” intervention in markets to curb the yen’s gains. Noda said he “will keep monitoring markets carefully” and that intervention “is a measure of last resort -- it would be meaningless if it were not a surprise.”

The yen has risen beyond the level that prompted Japan to unilaterally sell the currency on Aug. 4, its first intervention in currency markets since March.

Franc, Euro

The Japanese currency gained 5.5 percent over the past three months, making it the second-best performer among 10 major-economy currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The franc, the biggest gainer, rose 11 percent, while the dollar is down 1.7 percent.

The euro added 0.5 percent against the dollar, erasing earlier losses versus the dollar and yen amid speculation the Federal Reserve will consider measures to help ease financial market turmoil. Fed Chairman Ben S. Bernanke speaks at an economic conference next week in Jackson Hole, Wyoming. Last year at the event Bernanke foreshadowed a second round of bond purchases.

More than $6 trillion has been erased from the value of global equities this month on signs the U.S. recovery is stumbling, while the cost of insuring European sovereign debt is back to levels that triggered the region’s central bank to buy Italian and Spanish bonds on Aug. 8.

European Autos

The Stoxx 600 closed at the lowest level in two years, as a gauge of European banks sank to the lowest level since 2009. Daimler AG and Bayerische Motoren Werke AG slid more than 2.5 percent. Technology shares were one of two industry group among 19 in the Stoxx 600 to gain, as Autonomy Corp. surged 72 percent after the U.K. software company agreed to be bought by Hewlett-Packard.

The cost of protecting European bank bonds from default rose, with the Markit iTraxx SovX Western Europe Index of credit-default swaps linked to 15 governments climbing two basis points to 291. Two-year Greek yields surpassed 37 percent for the first time in almost a month, and 10-year yields increased 51 basis points to 16.16 percent.

Oil posted a fourth weekly decline. Futures settled 0.1 percent lower at $82.26, after falling as much as 3.9 percent and rallying 1.4 percent today. Oil in New York slipped below $80 a barrel earlier on concern that lower economic growth will curb fuel demand. Futures have dropped 18 percent since July 22, the biggest four-week decline since October 2008.

Gold Record

The S&P GSCI index of 24 commodities rose 1 percent. Gold jumped 1.7 percent to settle at $1,852.20 after trading at a record $1,887.63 earlier. The metal rallied for a seventh weekly advance, the longest run of gains since April 2007.

Treasury 30-year yields posted their biggest weekly drop since the depths of the financial crisis in December 2008. Yields on 10-year Treasury notes increased less than one basis point to 2.07 percent. This is the second period since the 1950s in which stocks have paid higher yields than bonds, according to Birinyi Associates Inc. The 2.28 percent dividend payout for S&P 500 companies is higher than the current rate on 10-year Treasury notes, according to data compiled by Bloomberg.



Before it's here, it's on the Bloomberg Terminal. LEARN MORE