Dow Reaches Lowest Since June on Budget, Israel Conflict

U.S. Stock Futures Advance on Cisco as Yen Weakens on Stimulus
Traders work on the floor of the New York Stock Exchange in New York. Photographer: Scott Eells/Bloomberg

U.S. stocks sank, sending the Dow Jones Industrial Average to the lowest level since June, as concern about the budget debate and conflict in Israel wiped out an early rally. Oil jumped and Treasuries were little changed.

The Dow slid 185.23 points, or 1.5 percent, to 12,570.95 and the Standard & Poor’s 500 Index tumbled 1.4 percent to 1,355.49 at 4 p.m. in New York, reversing an early gain of 0.4 percent and closing at the lowest level since July. Oil rose 1.1 percent as Israeli airstrikes killed a Hamas leader. Ten-year Treasury yields were down less than one basis point at 1.59 percent. The yen slid versus 15 of 16 major peers on speculation Japan will pursue more monetary easing.

Investors’ attention remained fixated on Washington, where lawmakers need to reach a budget agreement in order to avoid a so-called fiscal cliff of $607 billion in automatic tax increases and spending cuts next year. Earlier gains in stocks were led by technology shares as Cisco Systems Inc. reported better-than-estimated earnings.

“The recent wall of worry continues to mount,” Ryan Larson, the Chicago-based head of U.S. equity trading at RBC Global Asset Management (U.S.) Inc., said in an interview. His firm oversees $250 billion. “Middle East geo-political tensions, continued sovereign concerns about Greece and Spain, indecision ahead of the fast-approaching fiscal cliff and the fact that the major U.S. indices continue to trade under key technical levels are all weighing on sentiment.”

200-Day Average

The S&P 500 has fallen more than 5 percent since President Barack Obama’s re-election on Nov. 6 set up a budget showdown with the Republican-controlled House of Representatives. The benchmark gauge is trading below its average price from the past 200 days, and has pared its 2012 gain to less than 8 percent.

The Nasdaq Composite Index today slid 1.3 percent to extend its retreat from this year’s high in September to more than 10 percent, what is known as a correction. The S&P 500 is down 7.5 percent from an almost five-year high on Sept. 14.

The 14-day relative-strength index for the S&P 500, a gauge of market momentum, slid to 27.7 today and was below 30 for the first time since June. The last time the RSI slid below 30, the S&P 500 rallied 15 percent over the next three months before reaching its peak for the year on Sept. 14.

Market Leaders

Bank of America Corp., General Electric Co. and United Technologies Corp. lost more than 3 percent to lead declines in 28 of 30 stocks in the Dow. Indexes of industrial, financial and commodity companies in the S&P 500 lost at least 1.7 percent as all 10 of the main industries in the index tumbled.

Cisco, the biggest maker of computer networking equipment, rallied 4.8 percent after its results showed price reductions helped spur sales and cost cuts kept margins intact.

Stocks extended losses today as Egypt recalled its ambassador to Israel and Obama reiterated his call for Congress to pass an extension of Bush-era tax cuts for the first $200,000 of annual income for individuals and $250,000 for married couples. He said rates on earnings above those levels should be allowed to rise when they expire at the end of the year.

Obama said in a press conference that voters sent a “very clear message” on Nov. 6 that they want both parties to stop bickering and take the necessary action to cut the budget deficit. He warned that Republican “stubbornness” could trigger the fiscal cliff and push the nation into a recession.

Upcoming Talks

The president’s remarks spurred concern that lawmakers were not making progress in reaching an agreement to avert the fiscal cliff. Obama will sit down with Democratic and Republican congressional leaders Nov. 16 for an opening round of negotiations.

A number of Federal Reserve officials said the central bank may need to expand its monthly purchases of bonds next year after the expiration of Operation Twist, according to minutes of their last meeting. Under Operation Twist, scheduled to end in December, the Fed is swapping short-term Treasuries on its balance sheet for longer-term debt. The Fed in addition is buying $40 billion in mortgage-backed securities in a third round of so-called quantitative easing.

Oil halted a two-day slump as Ahmed al-Jabari, a leader in Hamas’ militant wing, and another Palestinian man were killed by Israel jets in the Gaza Strip, according to an eyewitness and a spokesman for the Hamas-run Health Ministry. Israel’s Army said Jabari was targeted in a “surgical” strike. It was followed by a volley of air attacks across the Gaza Strip and Israel’s army said it called up reserves in advance of a possible infantry assault.

‘Security Premium’

West Texas Intermediate oil traded in New York jumped 1.1 percent to $86.32 a barrel after the strike. Brent crude oil for December settlement, which expires tomorrow, rallied 1.3 percent to $109.65 a barrel in London.

“The Israeli strike on Gaza has raised the security premium” for oil, said John Kilduff, a partner at Again Capital LLC, a New York-based energy hedge fund. “This episode raises tension in an already troubled region.”

Gasoline climbed 1 percent in New York, extending earlier gains triggered as two New Jersey refineries remained shut since Hurricane Sandy’s Oct. 29 landfall.

Seventeen of the 24 commodities tracked by the S&P GSCI Index advanced, sending the gauge up 0.7 percent. Cocoa, lead and coffee advanced at least 1 percent. The Dollar Index, a gauge of the currency against six major peers, was little changed after rising for five straight days and reaching a two-month high yesterday.

European Markets

European shares retreated after euro-area industrial production dropped the most in more than three years in September, led by declines in Portugal and Ireland.

Output in the 17-nation euro area shrank 2.5 percent from August, when it increased 0.9 percent, the European Union’s statistics office in Luxembourg said. Economists had projected a drop of 2 percent, according to the median of 35 estimates in a Bloomberg News survey.

The Stoxx Europe 600 Index fell for the fifth time in six days, losing 0.9 percent. ICAP Plc sank 9.2 percent to the lowest since March 2009 as the world’s largest broker of transactions between banks said fiscal first-half pretax profit fell 26 percent.

Spanish 10-year yields climbed nine basis points to 5.94 percent after retreating yesterday amid speculation the nation would seek bailout funds. Italian 10-year rates were little changed at 4.96 percent, while German yields rose less than one basis point to 1.34 percent.

German Auction

Germany sold two-year notes at a negative yield for the second time on record, auctioning 4.3 billion euros ($5.5 billion) of debt at an average yield of minus 0.02 percent, according to a statement from the Bundesbank. It’s the first time since July the rate has been below zero, meaning investors who hold the security until it matures will receive less than they paid to buy it.

The pound dropped 0.4 percent against the euro and reversed an early advance to trade at a two-month low against the dollar after the Bank of England cut its outlook for the U.K. economy and said growth may be “weaker for longer” due to a bigger impact from the financial crisis.

Emerging-market stocks slipped for a fifth straight day, the longest slump since August. Fibria Celulose SA, the world’s largest pulp producer, sank 5.8 percent in Sao Paulo and Tecnisa SA, a Brazilian homebuilder, slumped 16 percent as profit trailed estimates. Siam Cement Pcl declined to the lowest level this month in Bangkok.

China Construction Bank Corp., the nation’s second-largest lender by assets, said it can keep non-performing loans under control, Financial News reported.

China’s 18th Party Congress drew to a close today. Vice President Xi Jinping and Vice Premier Li Keqiang were reappointed to the Chinese Communist Party’s Central Committee, positioning them to take over the country’s top two posts.

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