U.S., Europe Stocks Drop as Banks Fall; China Shares Gain

Stocks fell in the U.S. and Europe, led by financial shares, amid concern about weakening bank earnings and a political showdown in Washington over the budget. Commodities retreated, while Chinese equities rallied after industrial production beat estimates.

The Standard & Poor’s 500 Index lost 0.5 percent to 1,701.84 at 4 p.m. New York time, capping its first three-day retreat in a month and trimming its third-quarter rally. The Stoxx Europe 600 Index dropped 0.5 percent. The Shanghai Composite Index jumped 1.3 percent after a two-day holiday in China. Copper slid after a report showed Chinese imports of the metal decreased and oil dropped to a six-week low on easing concern that Syria’s conflict will disrupt supplies.

The biggest U.S. banks’ fixed-income trading revenue will probably fall 20 percent in the third quarter from a year ago, according to Atlantic Equities LLP. Federal Reserve Bank of New York President William C. Dudley and the Atlanta Fed’s Dennis Lockhart both said the economy still needs monetary stimulus, while Dallas Fed President Richard Fisher said the central bank harmed its credibility with the decision last week not to taper $85 billion in monthly bond purchases.

“The market has had quite a run,” Scott Armiger, chief investment officer at Christiana Trust in Wilmington, Delaware, said in a phone interview. The firm has $6 billion under administration. “At some point, investors are going to say ‘what’s underpinning this strong rally? We need some solid numbers.’ The sales numbers aren’t great and earnings keep getting revised down.”

Banks Retreat

Citigroup Inc., JPMorgan Chase & Co., BB&T Corp., Regions Financial Corp. and Bank of America Corp. lost more than 2 percent to lead declines in 23 of 24 stocks in the KBW Bank Index. Citigroup’s quarterly revenue may fall by “significantly more” than 10 percent amid a decline in trading revenue, the Financial Times reported, citing unnamed people familiar with the matter. Goldman Sachs Group Inc. and Morgan Stanley each fell more than 2.6 percent each.

Richard Staite, an analyst at Atlantic Equities, cut his estimate for Goldman Sachs’ per-share earnings by 18 percent and Morgan Stanley’s by 25 percent. Staite also reduced his estimate at Citigroup by 14 percent. JPMorgan Chase, the biggest U.S. bank, and Barclays Plc have told investors that third-quarter trading revenue will probably drop from a year earlier. Jefferies Group LLC said last week that revenue from fixed-income trading plunged 88 percent in its fiscal third quarter that ended Aug. 31 compared with the same period in 2012.

Apple Inc. led an advance in technology stocks, jumping 5 percent after selling a record 9 million iPhones in the weekend debut of two models. BlackBerry Ltd. was little changed in Toronto after getting a tentative $4.7 billion buyout offer from a group led by its biggest shareholder, forging a path to go private after a new line of smartphones failed to catch on.

Economy Watch

The S&P 500 is up about 19 percent so far this year, including a 6 percent rally in the third quarter.

Reports this week on data from second-quarter U.S. gross domestic product to consumer confidence and new home sales may help investors gauge the outlook for stimulus tapering from the Fed. Bullard told Bloomberg TV that last week’s decision to retain its $85 billion a month in bond buying was a “borderline decision” after “weaker data came in.”

The U.S. House of Representatives voted last week to finance the federal government through mid-December and choke off funding for President Barack Obama’s health-care law, setting up a showdown with the Senate and the White House.

Government Funding

Government funding expires Oct. 1 and the Treasury is expected to exhaust its ability to borrow funds in mid-October, when it will reach the statutory debt limit. The White House said Obama would veto the House bill. The Senate will consider its version of the funding measure next week.

Banks helped lead declines in the Stoxx 600 as Barclays Plc dropped 2.6 percent. The volume of shares changing hands in Stoxx 600 companies was 6.3 percent below the 30-day average and in-line with the average for S&P 500 stocks.

The Stoxx 600 has advanced for three straight weeks, driving its valuation to 14.4 times estimated earnings, the highest since the end of 2009, according to data compiled by Bloomberg. The gauge has risen more than 5 percent in September, putting it on course for the biggest monthly gain in almost two years. A gauge of euro-area services and manufacturing rose to 52.1 in September, the highest level since June 2011.

German Elections

German stocks fell today as investors considered the composition of a new government following Angela Merkel’s election victory. The DAX Index slipped 0.5 percent today and the yield on the 10-year bund fell 2.5 basis points to 1.92 percent. Merkel secured the biggest election victory since Helmut Kohl’s 1990 post-unification triumph.

Merkel’s Christian Democratic bloc took 41.5 percent of the vote in Germany while the Social Democrats won 25.7 percent, according to official results. She is still short of a majority and need a coalition partner to govern Europe’s biggest economy.

“The election resulted in a really strong chancellor, though one who is not yet able to govern,” said Michael Woischneck, who helps oversee about $1.6 billion in equities at Lampe Asset Management in Dusseldorf, Germany. “The negotiations between the two main parties may not be as smooth as people had hoped, which could force some market jitters.”

About 11 stocks increased for every one that fell in the Shanghai Composite Index. The preliminary reading of 51.2 for a Purchasing Managers’ Index compiled by HSBC Holdings Plc and Markit Economics compared with the median estimate of 50.9 in a Bloomberg News survey.

Australia’s dollar climbed versus 15 of 16 major peers, increasing 0.5 percent to 94.44 U.S. cents. The euro was down 0.2 percent at $1.3496 after touching a seven-month high of $1.3569 on Sept. 19. The yen jumped 0.6 percent to 98.77 per dollar.

Treasury Yields

Treasury 10-year note yields fell 3.3 basis point to 2.70 percent. The Fed last week unexpectedly refrained from reducing its $85 billion in monthly asset purchases, saying it needed to see more signs of sustained labor market gains. Fed Bank of St. Louis President James Bullard said Sept. 20 that it was a “borderline decision.”

The New York Fed’s Dudley said policy makers must “forcefully” push against economic headwinds as the U.S. has yet to show “any meaningful pickup” in momentum.

“The economy still needs the support of a very accommodative monetary policy,” Dudley, who is vice chairman of the Federal Open Market Committee, said today in a speech in New York. “Improving economic fundamentals versus fiscal drag and somewhat tighter financial conditions are pulling the economy in opposite directions, roughly canceling each other.”

Metals, Oil

Copper paced declines in industrial metals, falling by as much as 1.6 percent to $7,166.50 per metric ton before paring its loss to 0.5 percent. Refined copper imports by China fell 10 percent to 262,942 tons in August from July, the General Administration of Customs said yesterday. Nickel slid 0.6 percent and tin declined 0.3 percent.

West Texas Intermediate crude oil declined 1.1 percent to $103.59 a barrel, the lowest since Aug. 8. Oil tumbled 1.6 percent Sept. 20, bringing its retreat in the week to 3.3 percent, as Libya’s oil production expanded and President Bashar al-Assad said Syria will make information about its chemical weapons available.

The MSCI Emerging Markets Index added 0.3 percent, poised for an 8 percent third-quarter rally, as Brazil’s Ibovespa climbed 0.6 percent after losing almost 3 percent in the previous two sessions. India’s Sensex slumped 1.8 percent today after the Reserve Bank of India unexpectedly increased interest rates last week.

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