Stocks sank, dragging the Standard & Poor’s 500 Index lower for a sixth straight day, and costs to insure European government debt rose to a record after a German bund auction fueled concern the debt crisis is worsening. Treasuries erased losses after a record-low yield at an auction.
The S&P 500 lost 2.2 percent to 1,161.79 at 4 p.m. in New York, while the MSCI Emerging Markets Index extended its longest slide since 2009. Oil lost 1.9 percent. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments reached an all-time high of 381, while the euro weakened to a six-week low after Germany failed to find buyers for 35 percent of the bonds offered at an auction. Ten-year German yields climbed 23 basis points and France’s rose 16 points.
Concern that turmoil in European bond markets is threatening the global economic recovery was amplified by data showing European services and manufacturing output shrank for a third month, while a preliminary gauge indicated China’s manufacturing contracted by the most since March 2009, according to reports by Markit Economics and HSBC Holdings Plc showed. In the U.S., durable goods orders fell and jobless claims topped forecasts.
“Evidence is slowly mounting that ’containment’ is a pipe dream,” Peter Cecchini, head of institutional equity derivatives strategy at Cantor Fitzgerald LP in New York, said in a note to clients. “We continue to see downside in the U.S. equity markets to 1,000 on the S&P.”
The S&P 500 extended its November tumble to 7.3 percent and is trading 10 percent below 1,293, the average year-end forecast of Wall Street strategists. Stocks in the index are valued at less than 12 times estimated earnings, compared with 14.7 times at the end of last year. The index ended today’s session down 15 percent from a three-year high at the end of April and 26 percent below its record in 2007. The benchmark gauge of U.S. equity has rebounded 5.7 percent from its 2011 low in October, trimming a gain of as much as 17 percent.
Financial shares in the S&P 500 have fallen 13 percent as a group to lead the market’s November slide, with Goldman Sachs Group Inc. and Bank of America Corp. trading at their lowest prices since the bear-market bottom in March 2009.
Financials, commodity producers and technology companies led losses among the 10 main industries today, losing at least 2.4 percent. Bank of America and Alcoa Inc. slid more than 4 percent to lead the Dow Jones Industrial Average stocks down 236.17 points to 11,257.55. Deere & Co. rallied 3.9 percent as the largest farm-equipment maker reported profit that topped analysts’ projections.
Bank Stress Tests
The KBW Bank Index 3.4 percent retreated to a seven-week low as all 24 of its stocks fell. The Federal Reserve told the 31 largest U.S. banks to test loan portfolios and trading books against a recession and a European market shock to ensure they have enough capital to withstand losses. The most severe test scenarios include a jobless rate of 13 percent, an 8 percent drop in GDP and a 21 percent plunge in home prices.
“By taking these draconian views of what could happen in the market, if they in fact force the banks to defense themselves against the outlook that they’ve put up, they’ll cause a recession,” Richard Bove, analyst at Rochdale Securities LLC in Lutz, Florida, said in an interview on Bloomberg Television.
Stocks slipped yesterday after the government revised third-quarter economic growth to a 2 percent annual rate from an earlier 2.5 percent estimate.
Reports today showed durable goods orders fell 0.7 percent last month, less than forecast, after a 1.5 percent drop in September that was more than twice as large as first reported. Consumer spending rose less than forecast in October, increasing 0.1 percent, while the 0.4 percent gain in personal income topped the median economist estimate. Initial jobless claims totaled 393,000, more than the 390,000 average estimate.
Jim Chanos, founder of the Kynikos Associates Ltd. hedge fund, said that while the chances of a recession may be increasing, the U.S. economy is the “best house in a bad neighborhood” and American banks were through most of their problems.
“The too-big-to-fails are too big to fail, and we know that,” he told Bloomberg Television’s “In the Loop” program. “The moral persuasion that the Fed is trying to put out there right now, under the rubric of Dodd-Frank, is let’s alter our behavior, guys. Let’s make sure a lot of value does not go out to equity holders or bondholders when we should be retaining capital,” he said of the Fed stress tests.
Record 7-Year Auction
Ten-year Treasuries erased losses after the U.S. sold $29 billion of seven-year securities at a record low yield of 1.415 percent, wrapping up $99 billion of note sales this week. Ten-year yields fell four basis points to 1.88 percent after climbing as much as four points earlier. The rate is up from a record low of 1.67 percent on Sept. 23.
U.S. Treasuries maturing in seven to 10-years have returned 14 percent this year, outperforming a 9.3 percent return for the broader Treasury market, according to Bank of America Merrill Lynch indexes, as of yesterday.
Crude fell 1.9 percent to $96.17 a barrel in New York. Gold for December delivery lost 0.4 percent to $1,695.90 an ounce as the stronger dollar decreased demand for the precious metal as an alternative investment, while copper futures retreated 1.7 percent. The S&P GSCI Index lost 1.5 percent as natural gas and hogs had the only gains among 24 commodities tracked by the index.
JPMorgan Chase & Co. downgraded commodities to “underweight,” saying “policy failures in the U.S. and Europe have darkened the six-month outlook.” Analysts Colin Fenton and Jonah Waxman wrote in a report dated yesterday that the U.S. congressional supercommittee’s failure to agree on plans to cut the deficit damages confidence in the “U.S. seriousness of purpose.”
The yield gap between Belgian 10-year notes and benchmark German bunds widened to a euro-era record of 343 basis points before paring its gain and trading at 334. The yield on Spain’s 10-year bonds increased four basis points to 6.65 percent. Credit-default swaps insuring French government bonds rose 10 basis points to 250, Belgium’s were 29 basis points higher at 380 and contracts tied to Spanish debt climbed eight basis points to 493, all records, CMA prices show.
Luxembourg Finance Minister Luc Frieden said talks on the rescue plan for Dexia SA are “continuing intensively.”
“The costs of Dexia’s guarantee are putting Belgium’s finances under such pressure that France may have to take a larger slice of the losses, which some analysts feel could be the straw that may break the back of France’s credit rating,” Bill Blain, a strategist at Newedge Group in London, wrote in a research note. “Concerns on U.S. debt, economic performance and rising China fears contribute to the miserable background.”
Bond-market turmoil that began more than two years ago in Greece and infected Ireland, Portugal, Italy and Spain is threatening France and Belgium and risks engulfing Germany, the region’s biggest economy. The region’s leaders are struggling to find a fix for the crisis. German Chancellor Angela Merkel’s coalition is no longer categorically ruling out the issuance of a joint euro-region bond, Reuters reported, citing a report by German daily Bild in advance of an article to appear in tomorrow’s edition.
Germany’s 10-year bond yield surged 23 basis points to 2.15 percent today, the highest in almost a month. The government failed to get sufficient bids at an auction of benchmark 10-year bunds today to reach its maximum sales target of 6 billion euros ($8.1 billion).
Italian 10-year bond yields rose 15 basis points to 6.97 percent even as the ECB bought the nation’s debt, according to three people with knowledge of the transactions, who declined to be identified because the trades are confidential. A spokesman for the ECB in Frankfurt declined to comment today.
The cost for European banks to fund in the U.S. currency reached the highest level since December 2008. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, widened to 139 basis points below the euro interbank offered rate.
The dollar strengthened against all 16 major peers and the Dollar Index, a gauge of the currency against six major counterparts, rose 0.9 percent to 79, the highest on a closing basis since Oct. 4.
The euro weakened against 10 of 16 major peers, falling 0.6 percent against the yen and slipping for a fourth straight day versus the Swiss franc, the longest run of declines in more than two months.
Goldman Sachs Group Inc. recommended investors end a money-losing bet that the euro will gain against the dollar after Greece and Italy got new governments.
Policymakers are unlikely to do enough in coming days to appease investor concern about a possible breakup of the euro, Valentin Marinov, a Citigroup Inc. foreign-exchange strategist in London, wrote in a note to clients. The shared currency will probably underperform the dollar and yen and the slowdown in Europe may lead to the relative underperformance of the Swiss franc, pound and Nordic currencies, Marinov wrote.
The pound declined 0.6 percent to $1.5538 as Bank of England minutes from this month’s meeting showed policy makers were unanimous in their decision to keep the target for asset purchases this month, as some officials said an increase in stimulus may be needed in the future. British bonds advanced, pushing 10- and 30-year gilt yields to record lows.
Six shares fell for every one that gained in the Stoxx 600 as HSBC Holdings Plc lost 1.2 percent to pace a retreat in 39 of 50 banks. Man Group Plc, the biggest publicly traded hedge-fund manager, tumbled 6 percent. Mining shares retreated after Australia’s lower house of parliament passed legislation for a tax on coal and iron-ore profits. Rio Tinto Group declined 2.3 percent
The MSCI Emerging Markets Index lost 2.8 percent, declining for a seventh day, the longest slump since 2009. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong retreated 2.8 percent. Benchmark gauges in India, South Korea and Taiwan lost more than 2 percent. The Turkish lira retreated 1 percent after Turkey’s outlook was cut to “stable” from “positive” by Fitch Ratings.