Stocks Fall, Treasuries Rise as Deficit Talks Break Down; Euro Pares Loss
Stocks sank, extending last week’s drop, and Treasuries rose amid concern the U.S. government will be forced to submit to $1.2 trillion in automatic spending cuts. Commodities fell, while the euro trimmed its earlier decline versus the dollar.
The Standard & Poor’s 500 Index lost 1.9 percent to close at a six-week low of 1,192.98 at 4 p.m. in New York. The MSCI All-Country World Index sank 2.3 percent in its first six-day slump since August. Yields on 10-year Treasury notes fell four basis points to 1.97 percent, while the cost of insuring against default on European government debt approached a record high. The euro slipped 0.2 percent to $1.3496 after weakening as much as 0.7 percent. The Dollar Index rose 0.3 percent.
The U.S. deficit-cutting congressional supercommittee said today that it failed to reach an agreement, setting the stage for automatic cuts in 2013 and fueling concern that economic- stimulus measures that are set to expire will not be renewed. Germany’s Finance Ministry said the country’s expansion has gotten “noticeably slower,” while Moody’s Investors Service said France’s rising financing costs are increasing the nation’s fiscal challenges.
“The global selloff in risk assets reflects concerns about the inability of policymakers to catch up with unsettling economic and financial realities, particularly in Europe and America,” Mohamed A. El-Erian, the chief executive officer at Pacific Investment Management Co. in Newport Beach, California, said in an e-mail. His firm runs the biggest bond fund.
The S&P 500 extended last week’s 3.8 percent decline, its worst drop in two months. Stocks maintained losses even after the National Association of Realtors said sales of previously owned homes in the U.S. unexpectedly rose 1.4 percent to a 4.97 million annual rate, a sign falling prices may be luring buyers into the market.
Indexes of financial, industrial and technology companies lost at least 1.9 percent to lead declines in all 10 of the main industry groups in the S&P 500. Bank of America Corp. slid 5 percent to $5.49, the lowest since March 2009. Hewlett-Packard Co. fell 4 percent in regular trading, then rebounded 1.7 percent in the extended session after reporting earnings that topped analyst estimates. Caterpillar Inc. lost 3 percent.
Today’s drop pushed the S&P 500 below levels representing the top of a so-called trading range that prevailed in the two months after the U.S. was stripped of its AAA credit rating by S&P on Aug. 5. Rallies after the downgrade brought the S&P 500 to closing highs of 1,204.49 on Aug. 15, 1,218.89 on Aug. 31 and 1,216.01 on Sept. 16, data compiled by Bloomberg show.
Failure among the supercommittee to reach an agreement could send the S&P 500 down 9.5 percent from last week’s closing level to 1,100, according to Goldman Sachs Group Inc. equity strategist David Kostin.
The failure would “reflect poorly on Congress,” Kostin wrote in a report dated Nov. 18. “It would showcase -- as was the case in August -- the inability of elected officials to act in the long-term best interest of all Americans.”
Today is the panel’s deadline to receive a Congressional Budget Office analysis of the effects of any proposal on the deficit. The law requires that the estimates be available for 48 hours before the panel votes, and the supercommittee has a Nov. 23 target date for reaching a deal.
JPMorgan Chase & Co. (JPM) analysts said in a note to clients that a payroll-tax holiday and emergency unemployment benefits, two “high-profile economic support programs” scheduled to expire at the beginning of next year, are unlikely to be extended given the difficulty the supercommittee is having in reaching an agreement.
“A deal in the supercommittee was expected to pave the way to extend the stimulus that is in the system,” said Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc, said in a telephone interview. If stimulus is not extended, he said, “you get a big hit to the economy in the first quarter right at the point when the economic fallout from the European debt crisis is hitting.”
The failure to reach an agreement isn’t likely to trigger a downgrade of the U.S. credit rating, according to BlackRock Inc.’s Eric Pellicciaro and ING Bank NV’s Chief International Economist Rob Carnell.
“In the end, there’s still $1.2 trillion in cuts that are going to come through,” Pellicciaro, the head of global rates investments at BlackRock, said in an interview with Sara Eisen and Michael McKee on “Bloomberg On the Economy” on Bloomberg Radio. “They may not be exactly the way politicians want to see it, but they’re cuts nonetheless.”
The yield on the two-year Treasury note fell one basis point to 0.27 percent. A U.S. auction of $35 billion in two-year notes drew record demand. The notes drew a yield of 0.280 percent, compared with a forecast of 0.287 percent in a Bloomberg News survey of seven of the Federal Reserve’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 4.07, compared with an average of 3.32 for the previous 10 sales.
The Stoxx Europe 600 Index sank 3.2 percent, extending last week’s 3.7 percent decline, as almost 45 stocks dropped for every one that rose. All 19 industries in the benchmark measure retreated more than 1.8 percent, with mining stocks falling 6.1 percent to lead the drop.
Spain’s benchmark IBEX 35 Index (IBEX) of stocks slumped 3.5 percent to a two-month low. Spanish Prime Minister-elect Marian Rajoy faced mounting pressure to unveil his cabinet and plans for reducing the euro-area’s third-largest deficit as borrowing costs neared records after the People’s Party yesterday ousted the ruling Socialists, winning the biggest parliamentary majority in a Spanish election in almost 30 years.
Spain’s 10-year yield increased 17 basis points to 6.55 percent and the gap between Spanish and German borrowing costs widened 23 basis points to 464 basis points, near a euro-era record.
France’s 10-year bond was up less than one basis point at 3.47 percent. The Italian yield advanced two basis points to 6.66 percent, leaving the difference in yield with benchmark German bunds seven basis points wider at 474 basis points. The French-bund spread rose 5.5 basis points to 156 as 10-year bund yields decreased five basis points to 1.92 percent.
The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose 9 basis points to 361, compared with an all-time high of 362 reached on Nov. 15.
The cost for European banks to fund in the U.S. currency climbed to the highest since December 2008. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, increased to 139 basis points below the euro interbank offered rate, from 130 at the end of last week.
Copper sank 2.9 percent, zinc tumbled 2.5 percent and lead retreated 3.2 percent as all but six of 24 commodities tracked by the S&P GSCI Index declined, sending the gauge down 1 percent. West Texas Intermediate oil for January delivery slipped 0.8 percent to settle $96.92 a barrel in New York before paring losses in extended trading.
The MSCI Emerging Markets Index sank 2.6 percent to a one- month low. Russia’s Micex Index slid 4.8 percent and the Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong lost 2.3 percent. India’s Sensex fell 2.6 percent.
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