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Stocks Sink on U.S. Credit Outlook as Euro Falls on Debt Crises

April 19, 2011

businessweek

U.S. stocks sank the most in a month, oil slid and gold rose to a record after Standard & Poor’s cut the American credit outlook to negative and concern about Europe’s debt crisis worsened. Greek two-year bond yields surged to 20 percent for the first time since at least 1998.

The S&P 500 tumbled 1.6 percent to 1,298.09 at 1:13 p.m. in New York and the Stoxx Europe 600 Index slid 1.7 percent. Ten- year Treasury yields lost three basis points to 3.38 percent as concern about Europe’s finances overshadowed S&P’s move. The euro lost 1.4 percent to $1.4227, while Portuguese debt- insurance costs rose to a record. The S&P GSCI index of 24 commodities slid 1.3 percent as oil and cocoa tumbled.

S&P assigned a one-in-three chance it will lower the U.S. rating in the next two years, saying the credit crisis and recession that began in 2008 worsened a deterioration in public finances. Budget differences among Democrats and Republicans remain wide and it may take until after the 2012 elections to get a proposal that addresses the concern, S&P said.

“This is another indication of the need for the U.S. to better control its fiscal destiny, both for its sake and that of the global economy,” said Mohamed El-Erian, chief executive officer at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest manager of bond funds. “Absent credible medium-term fiscal reform, every segment of U.S. society would be faced with higher borrowing costs, a weaker dollar and a less bright outlook for employment, investment and growth.”

Broad Decline

Commodity, industrial and technology companies had the biggest declines among 10 groups in the S&P 500, all of which dropped. Caterpillar Inc., Bank of America Corp. and Alcoa Inc. lost at least 4 percent to lead declines in all 30 stocks in the Dow Jones Industrial Average. Gap Inc. slumped 3 percent to $21.66 after Goldman Sachs reduced its rating on the shares to “sell” from “neutral” and said it sees long-term declines in comparable-store sales.

The S&P 500 has surged 92 percent from its bear-market low in March 2009 amid higher-than-estimated earnings and government stimulus measures. The Federal Reserve and U.S. agencies have lent, spent or guaranteed about $8.2 trillion to lift the economy from the worst slump since the Great Depression, according to data compiled by Bloomberg.

Global Retreat

The MSCI All-Country World Index of shares in 45 countries tumbled 1.8 percent. Global stocks also slid after China increased banks’ reserve requirements to lock up cash and cool inflation, and central bank Governor Zhou Xiaochuan said monetary tightening will continue for “some time.”

Thirty-year Treasury yields climbed less than one basis point to 4.48 percent. Two-year yields slipped four basis points to 0.66 percent. The dollar slid 0.9 percent to 82.42 yen, the lowest level of the month, while still strengthening against 14 of 16 major peers.

The cost to protect U.S. corporate bonds from default rose to the highest level this month. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 1.9 basis point to a mid-price of 95.9 basis points, according to index administrator Markit Group Ltd.

S&P cut its long-term outlook to negative from stable, while affirming its ‘AAA’ long-term and ‘A-1+’ short-term ratings.

‘Material Risk’

S&P said in the statement that it believes there is a “material risk” that U.S. officials may not reach an agreement on how to address budgetary challenges by 2013. Under President Barack Obama’s fiscal year 2012 budget, released in February, the total debt subject to the ceiling would be $20.8 trillion in 2016. The plan House Republicans approved April 15, written by Budget Committee Chairman Paul Ryan, would need a debt ceiling of at least $19.5 trillion, according to data compiled by Bloomberg Government.

“It’s truly a shot across the bow and a message to Washington, which has been clowning around on this and playing politics when they should toss ideology aside and focus on achievement,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “It’s a big deal. They’ve put us on notice.”

Treasury Assistant Secretary Mary Miller said today that S&P’s outlook on the U.S. credit rating “underestimates” the nation’s leadership.

‘Difficult Fiscal Challenges’

“We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation,” Miller said in a statement.

About 18 stocks declined for every one that gained in the Stoxx Europe 600. Commerzbank AG, Spain’s biggest lender, and France’s Societe Generale SA fell at least 3.9 percent. Smith & Nephew Plc, which had been identified as a bid target for Johnson & Johnson by analysts at Sanford C. Bernstein & Co., Morgan Stanley and Investec Securities, declined 3 percent after Synthes Inc. said it’s in talks about a possible takeover by J&J.

The euro depreciated against 13 of its 16 major counterparts, losing 2.2 percent versus the yen. Portugal’s 10- year yield climbed to a record 584 basis points above benchmark German bunds while the Greek spread reached 1,132 basis points, the most since Bloomberg began collecting the data in 1998.

Greek CDS

Credit-default swaps insuring Greek bonds jumped 66 basis points to 1,221, signaling a 64.5 percent chance of a default within five years, while those for Portugal climbed 18.5 basis points to 616.5, according to CMA.

Greece isn’t discussing restructuring its debt, Finance Minister George Papaconstantinou said April 16 in Washington. European Central Bank Governing Council members signaled over the weekend they will keep tightening monetary policy this year to curb inflation.

“The European story has a lot of risks to it as Germany is very strong but peripheral Europe is clearly quite weak, so the last thing they need is higher interest rates,” Adrian Mowat, JPMorgan Chase & Co.’s Hong Kong-based chief Asia and emerging- markets strategist, said in a Bloomberg Television interview.

The yield on Germany’s 10-year bund declined 13 basis points to 3.25 percent. The 10-year gilt yield slipped four basis points to 3.56 percent. The pound fell 0.5 percent versus the dollar after Ernst & Young LLP’s Item Club cut its economic outlook for the U.K.

Oil fell for the first time in four days in New York after Saudi Arabia, the world’s biggest crude exporter, said the global market has enough supplies to meet demand. Crude for May delivery slumped 2.4 percent to $107.07 a barrel.

Cocoa for July delivery declined $119, or 3.8 percent, to $3,038 a metric ton on ICE Futures U.S. in New York, amid concern demand for commodities may slow as China fights inflation. Wheat, corn and soybeans led gains among S&P GSCI commodities. Gold for June delivery climbed as much as 0.9 percent to $1,498.60.

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