Stocks tumbled, wiping out the weekly gain for the Standard & Poor’s 500 Index, while the dollar, Treasuries and gold rose following a report showing American job growth stalled in August. European sovereign-debt risk climbed to a record amid bickering over Greece’s bailout.
The S&P 500 fell 2.5 percent to 1,173.97 at the 4 p.m. close in New York and the Stoxx Europe 600 Index lost 2.4 percent. The Dollar Index rose 0.4 percent in a fourth straight gain, its longest rally since January, and the Swiss franc rose versus all 16 major peers. Ten-year Treasury yields sank 14 basis points to 1.99 percent, four points above a record low, and the 30-year rate reached the lowest since 2009. Gold jumped 2.6 percent to $1,876.90 an ounce; oil lost 2.8 percent.
The Labor Department said U.S. payrolls were unchanged last month, the weakest reading since September 2010 and worse than the median economist forecast that called for growth of 68,000. Stocks sank and Treasuries surged in August as investors bet that the odds of a recession had increased. Markets reversed course toward the end of the month amid speculation the Federal Reserve would act to spur growth.
“Another disappointing report that speaks to a severe unemployment crisis that, unfortunately, is becoming even more stubbornly embedded,” Mohamed A. El-Erian, the chief executive officer at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail. Pimco is the world’s largest bond-fund manager. “Along with Europe’s dislocations, this fuels concerns about the global economic outlook and the growing risk of a recession.”
Financial shares led losses amid concern banks will face greater liabilities from practices that led to the 2008-2009 financial crisis. Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Barclays Plc were sued by the Federal Housing Finance Agency over residential mortgage-backed securities. The agency, representing Fannie Mae and Freddie Mac, also named as defendants Nomura Holdings Ltd., HSBC Holdings Plc and Credit Suisse Group AG among 17 lenders targeted.
The FHFA has been demanding refunds from banks for loans sold to Fannie Mae and Freddie Mac that were based on false or missing information. The two government-backed mortgage finance firms had to be rescued by taxpayers as defaults on home loans soared toward record levels. The size of the suits may dwarf the $20 billion sought from the biggest mortgage servicers in a separate probe by 50 state attorneys general, one person familiar with the matter, who was not authorized to speak publicly about the issue, said before the suits were announced.
“If in fact all that cash gets taken away in these lawsuits, you are crashing the American banking system,” Richard Bove, an analyst with Rochdale Securities LLC in Lutz, Florida, said in an interview on Bloomberg Television. “If you make the assumption that over the next few years, all of these suits are going to be put in place and they’re all going to be won, you’re going to wipe out the American banking industry and you’re going to wipe out the American economy.”
Bank of America sank 8.3 percent and JPMorgan, Citigroup and Wells Fargo & Co. tumbled more than 4 percent to help lead declines in all 24 companies in the KBW Bank Index, which slid 4.5 percent and lost 7.4 percent in two days. Gannett Co. and Sears Holdings Corp. sank at least 6.6 percent to pace declines in the Morgan Stanley Cyclical Index of 30 stocks considered most-sensitive to economic growth.
Stocks sank in August, sending the MSCI All-Country World Index down 7.5 percent for the biggest loss since May 2010, after regional Federal Reserve reports showed a contraction in manufacturing and S&P’s downgrade of the U.S. government credit rating roiled markets. Treasuries returned 2.8 percent last month, the most since December 2008, according to data compiled by Bank of America Corp.
U.S. stocks surged on Aug. 26 after Fed Chairman Ben S. Bernanke indicated the economy isn’t deteriorating enough to warrant any immediate stimulus. The central bank vowed on Aug. 9 to keep interest rates “exceptionally low” until at least mid-2013, a day after the S&P 500 sank 6.7 percent for the biggest loss since 2008.
“I don’t think at this stage there is a lot the Fed can do to prevent a recession from happening,” David Rosenberg, the chief economist for Gluskin Sheff & Associates Inc. in Toronto, said in a Bloomberg Television interview. “We don’t have the fiscal policy bullets like we had a few years ago, and at the same time interest rates are at zero.”
Bearish bets against the S&P 500 rose to a nine-month high last month as short sellers increased speculation stocks may decline. The proportion of S&P 500 shares outstanding sold short on Aug. 29 rose to 3.03 percent, the most since the end of November and up from 2.37 percent at the beginning of August, according to New York-based researcher Data Explorers. Short selling of the gauge reached a three-year high of 5.52 percent in August 2008, before the index sank to a 12-year low in March 2009.
The yield curve, or the difference between two- and 30-year Treasury debt, narrowed to 310 basis points, the least in a year, as the jobless data bolstered the view that Fed Chairman Ben S. Bernanke will be inclined to take addition steps beyond the two previous rounds of debt buying, known as quantitative easing, or QE.
The central bank will likely extend the maturities of its portfolio by buying five- to 10-year Treasuries while shedding shorter-maturity debt, Pimco’s Bill Gross told Bloomberg Radio, in what has been referred to as “Operation Twist” after a similar 1960s program named after the dance crave of the time.
“I don’t know what form it will take and whether you call it a QE, there’s certainly opposition from the hawks in terms of the Fed,” Gross said. “We would stick in the 5- to 10-year area and I think that will be the focus for the Fed in terms of policy change come September.”
Among European shares, carmakers and banks led declines. AstraZeneca Plc slumped 3.7 percent after the drugmaker reported study results for its Crestor treatment. Straumann Holding AG, the world’s biggest maker of dental implants, slid 5.6 percent as Goldman Sachs Group Inc. advised selling the shares.
European sovereign default risk rose to a record. The Markit iTraxx SovX Western Europe Index of credit-default swaps insuring the debt of 15 governments rose 11 basis points to 310 at 4:30 p.m. in London, surpassing an all-time high closing price of 308 on Aug. 26. Swaps tied to Italian debt jumped 15 basis points to 400, topping last month’s record closing price of 391, according to CMA.
Greek 1-year debt yields surged 10.4 percentage points, or more than 1,000 basis points, to a record 72.05 percent. Rates on the nation’s two- and 10-year debt also reached all-time highs, while the yield on the benchmark German bund dropped 14 basis points to a record low 2.01 percent. The euro weakened against 10 of 16 major peers, losing 0.5 percent to $1.4194.
The International Monetary Fund opposes European plans to force Greece to put up collateral in its second rescue, said four people with direct knowledge of the matter. The use of collateral, a concession to win Finland’s backing for 109 billion euros ($155 billion) of loans pledged by euro leaders in July, would deny the IMF priority creditor status and violate Greek bondholders’ rights, said the people, who declined to be named because the talks are in progress.
IMF objections threaten to snag Europe’s crisis-management effort after aid of 256 billion euros for Greece, Ireland and Portugal failed to restore order. Europe also faces hurdles in trying to widen the powers of its rescue fund, with German lawmakers demanding a veto over its operations.