U.S. Stocks Fall on Cisco Outlook; Euro Weakens, Copper Gains
U.S. stocks fell for the third time this week as Cisco Systems Inc. said profit will miss analyst estimates, while the euro weakened and Irish bonds slid amid concern indebted European nations may need bailouts. London copper touched a record as China’s industrial production grew.
The Standard & Poor’s 500 Index sank 0.4 percent to 1,213.54 at 4 p.m. in New York. The measure extended losses after Walt Disney Co. reported earnings that trailed estimates. The euro weakened against 14 of its 16 most-traded peers and reached a one-month low versus the dollar. The yield on Irish 10-year bonds rose to a record 6.52 percentage points above benchmark German bunds.
Cisco’s forecast triggered a selloff in technology companies, the group that has led the S&P 500’s 16 percent rally since the end of August. Bank shares followed the euro and Irish bonds lower after French Finance Minister Christine Lagarde said yesterday that investors must share the cost of sovereign debt restructurings, backing a German call that helped drive yields on so-called peripheral bonds to record highs.
“Cisco’s sector is a bellwether in terms of companies’ capital expenditures,” said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, which oversees $105 billion. “It’s hard to look at one company and say we’re off track, but people will always try to look a little further for an idea of economic growth going forward. The backdrop to all this is the European situation, where these countries still face the challenge of bringing their fiscal houses in order.”
Yesterday’s Gain Lost
The S&P 500 wiped out yesterday’s 0.4 percent advance and fell below its lowest close since Nov. 3, the day the Federal Reserve announced plans to pump as much as $600 billion into the economy through purchases of Treasuries.
Cisco, the sixth-largest U.S. technology company by market value, tumbled 16 percent, the most in more than 16 years. The company faced a “challenging economic environment” last quarter, Chief Executive Officer John Chambers said. He blamed the slump on lower government spending in developed countries and market-share losses. Competition has forced Cisco to cut prices on some products and seek acquisitions to maintain growth.
S&P 500 technology companies lost 1.8 percent collectively, the biggest drop among 10 groups. JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. paced losses in banks.
Disney slumped 2.9 percent after saying fourth-quarter profit excluding certain items fell to 45 cents a share, missing by 2 cents the average estimate of 25 analysts in a Bloomberg survey.
“Like Cisco, Disney is the kind of company that’s held to high regard and they basically disappointed,” said Jason Cooper, who oversees $2.5 billion in South Bend, Indiana at 1st Source Investment Advisors, which owns shares of Disney. “We had such negative news today it probably didn’t matter who you were, if you had any kind of miss or blip, you were going to get punished. This will probably continue to add negative pressure when we see stocks open tomorrow.”
Almost 76 percent of companies in the S&P 500 that reported earnings since Oct. 7 have beaten analysts’ estimates for per- share profit, according to data compiled by Bloomberg. Viacom Inc., the owner of MTV Networks and Comedy Central, had adjusted quarterly profit of 75 cents a share, compared with the 70-cent average estimate of analysts in a Bloomberg survey. Its Class B shares rallied 2.8 percent.
Three stocks fell for every one that gained in Europe’s Stoxx 600. Bank of Ireland tumbled 7.9 percent and Royal Bank of Scotland Group Plc slumped 2.7 percent. Telefonica SA, Europe’s second-biggest phone company, slid 1.6 percent as earnings missed estimates. Siemens AG rallied 2.6 percent after boosting its dividend.
The euro slid 0.9 percent to $1.3658, while the Dollar Index, which tracks the U.S. currency against those of six trading partners, added 0.7 percent, rising for the fifth consecutive day, the longest run of gains since August.
The yuan rose 0.1 percent to 6.6257 per dollar as leaders of the Group of 20 nations gathered in Seoul amid growing concern about trade imbalances and foreign-exchange controls. The currency reached 6.6173 in Shanghai, the highest since 1993, amid speculation policy makers will accept a stronger yuan to curb inflation and meet the demands of trading partners.
The bonds of Ireland, Greece and Spain declined, sending spreads over bunds wider. The gap between Greek 10-year bonds and similar-maturity German debt increased 20 basis points, or 0.20 percentage point, to 917 basis points, with the Spanish- German spread expanding 16 basis points to 220 basis points.
‘Nail in Coffin’
“Lagarde’s comments mentioned restructuring, and that’s another nail in the coffin” for peripheral debt, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. “There’s still a big constituency of investors and traders who have not recognized until now that restructuring could happen.”
The cost of insuring the bonds of Irish banks soared to distressed levels amid concern that the government won’t be able to afford the cost of bailing out the nation’s banks. Credit- default swaps on subordinated debt of Allied Irish Banks Plc, the nation’s second-largest lender, are 60 percent upfront and 5 percent a year, meaning it costs 6 million euros ($8.2 million) in advance and 500,000 euros annually to insure 10 million euros of the bank’s debt for five years.
U.S. bond markets are closed for the Veterans’ Day holiday.
The Kospi, South Korea’s benchmark equities gauge, plunged 2.7 percent in the last minute of trading, as the expiration of options contracts spurred the largest-ever sale of equities by foreign investors. The MSCI Emerging Markets Index of 21 countries retreated 0.9 percent, falling for a second day after reaching the highest level since June 2008 last week.
Goldman Sachs Group Inc. recommended closing out its suggested bet that emerging market stocks will outperform the S&P 500, citing improving U.S. economic data on jobs and service industries and inflation in developing nations. Investors should close positions that benefit from outperformance of the iShares MSCI Emerging Markets Index Fund over the S&P 500, Goldman Sachs strategists said in a note to clients.
The emerging-markets exchange-traded fund gained 29 percent from the end of June through yesterday, compared with an 18 percent advance for the S&P 500.
“The near-term outlook for this type of relative trade versus the U.S. is more muddied than it has been for some time,” the Goldman report said. Equities in emerging markets “should remain broadly well-supported, but after a strong run since September, it will be important to be more selective going forward.”
China had its debt rating raised one step today to Aa3 by Moody’s Investors Service, which cited the nation’s financial strength and ability to contain losses from a credit boom.
China’s Shanghai Composite Index advanced 1 percent after Moody’s upgraded the nation’s debt to the fourth-highest investment grade. The nation’s efforts to tackle asset bubbles and avert the spread of bad loans has meant the “likely containment and effective management” of losses from record lending last year to counter the financial crisis, Moody’s said. That combined with China’s “resilient” economic growth were reasons for the upgrade, the ratings company said.
Copper pared gains after touching an all-time high of $8,966 a metric ton in London after China’s industrial production advanced 13 percent in October.
The S&P GSCI index of 24 commodities slipped 0.3 percent. Cotton futures, which reached a record for a seventh straight day during the trading session yesterday, declined amid mounting signs that demand will ease in China, the world’s biggest consumer. Orange juice also dropped.
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