Euro Plunges With S&P 500 Futures on Greece; China Set for Bear

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Don't Worry Too Much About Greece: Levkovich

The Standard & Poor’s 500 Index fell the most since April 2014 and erased its gain for 2015, while European shares capped their worst day this year on concern Greece will exit the euro. Treasuries advanced with the yen and gold as investors sought haven assets.

The S&P 500 slid 2.1 percent at 4 p.m. in New York. A measure of equity volatility surged the most since April 2013, breaking a streak of calm in U.S. markets. The Stoxx Europe 600 Index fell 2.7 percent, the most since Oct. 15, as Germany’s Dax Index had its worst day since November 2011. The MSCI All-Country World Index declined 2 percent for its biggest slide since June 2013. The yield on 10-year Treasury notes tumbled 15 basis points to 2.32 percent. The euro dropped 0.4 percent to 137.70 yen. It gained 0.6 percent to $1.1239.

Greece shut lenders and imposed capital controls, a measure that will deepen the country’s recession and risk driving it toward an exit from the euro. European leaders raised pressure on the country to re-engage, saying it’s up to the government to step back from the brink and stay in the euro. S&P lowered Greece’s credit rating one level and said the probability of the country leaving the euro is now 50 percent.

“This is going to get quite messy between now and the weekend,” Kevin Caron, a market strategist and portfolio manager who helps oversee $170 billion at Stifel Nicolaus & Co. in Florham Park, New Jersey. “There was an expectation that something would break positively at the last minute, but it appears it’s going to be a little messier than that. The rating agency downgrade is certainly part of it.”

Euro Exit

Prime Minister Alexis Tsipras unexpectedly called a July 5 referendum on the austerity demanded by creditors as the European Commission offered Greek voters a 10-point plan for bailout requirements. The current bailout expires Tuesday as a $1.7 billion payment is due to the International Monetary Fund.

The S&P 500’s decline Monday left it lower by 0.5 percent for the last three months, threatening to halt a streak of nine straight quarterly gains, the longest since 1998. The index is down 0.1 percent in 2015 and has fallen four straight days for the first time since March.

The decline is jolting equities out of a two-month torpor during this holiday-shortened week. The S&P 500 lost only 0.4 percent last week, after climbing to within a point of its all-time high, the ninth straight period without a move of at least 1 percent.

Monday’s drop of more than 2 percent was the first time since December the S&P 500 moved that much in either direction, breaking the longest streak of calm since February 2007.

Stock volatility surged with the Chicago Board Options Exchange Volatility Index jumping 34 percent, capping its biggest increase since April 2013. A gauge of European share swings climbed 15 percent to an eight-month high.

Contagion Risk

“We finally reached the breaking point,” Michael James, a managing director of equity trading at Wedbush Securities Inc. in Los Angeles, said by phone. “With so much uncertainty around a potentially negative outcome, the knee-jerk reaction will be to reduce risk assets. You have a potentially very ugly situation this week.”

With the ASE closed, exchange-traded funds tracking Greek equities turned into vehicles of pure speculation. A U.S. ETF slid 17 percent and the Lyxor ETF FTSE Athex 20 lost 15 percent in Germany before trading was suspended.

The yield on 10-year Greek bonds surged 423 basis points to 15.08 percent, the highest since December 2012. In March of that year the yield reached 44.21 percent. Depositary receipts of National Bank of Greece SA sank 24 percent in New York.

All but 20 of the shares trading in the Stoxx 600 fell, with banks and automakers leading declines. Spanish, Italian and Portuguese shares slid at least 3.6 percent. Germany’s DAX Index lost 3.6 percent.

The yield on Portugal’s 10-year bond jumped 37 basis points to 3.08 percent, while Spanish and Italian rates each increased 24 basis points.

Euro Resilience

Bulgarian bonds slid the most in eastern Europe and Romania’s Eurobonds fell on concern the nations’ banking industries would be rocked by the contagion of a Greek exit from the euro region.

While European equities sank and bonds rallied, reaction in other assets was somewhat muted. The euro erased losses against the dollar on speculation any contagion would be contained, while indicators of banking stress across Europe and in the U.S. suggest relative calm. The U.S. two-year interest-rate swap spread, a key measure of risk for banks, rose Monday only to a high matched last week.

Treasuries rose and the Bloomberg Dollar Spot Index fell as the Greece crisis emboldened traders to cut bets the Federal Reserve will rush to raise interest rates this year after improving U.S. economic data boosted the case for the Fed to raise rates as early as September.

Data Watch

Data Monday showed contracts to purchase previously owned U.S. homes rose in May for a fifth month, indicating recent strength in the real-estate industry will be sustained.

Assured Guaranty Ltd. and MBIA Inc. tumbled at least 13 percent. The municipal-bond insurers were cut to neutral from buy at BTIG, which said the shares are “unbuyable” because of a possible debt default by Puerto Rico. The commonwealth is struggling to pass a budget that would allow it to make payments on a $72 billion debt load.

The MSCI Emerging Markets Index fell 2 percent, the most since July 2013. A Bloomberg gauge of 20 currencies slid 0.4 percent, the most in three weeks, with Turkey’s lira and Russia’s ruble losing at least 0.8 percent against the dollar.

The Shanghai Composite Index tumbled 3.3 percent, leaving it down 22 percent from its peak, as signs of an exodus by leveraged investors overshadowed the central bank’s effort to revive confidence with an interest-rate cut. Hong Kong’s Hang Seng China Enterprises Index of mainland shares slid 3 percent, extending declines from a high on May 26 to 14 percent.

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