Stocks, Euro Slide on Government Debt Concern

Stocks, Euro Slide on Government Debt Concern; Commodities Sink

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By Rita Nazareth and Jeff Kearns

May 4 (Bloomberg) -- U.S. equities tumbled the most sinceFebruary and European stocks erased their 2010 gain, while theeuro slid to a one-year low, amid concern a government debtcrisis is spreading. Commodities and shares of their producerssank on a slowdown in Chinese manufacturing. Treasuries rallied.

The Standard & Poor’s 500 Index slid 2.4 percent at 3:32p.m. in New York and the Stoxx Europe 600 Index plunged 2.9percent, leaving it down 0.4 percent this year. The euroweakened below $1.30 for the first time since April 2009. Copperfell to the lowest since February, while oil sank the most inthree months as the dollar rose against 14 of 16 majorcounterparts. The 10-year Treasury yield slid 8 basis points to3.6 percent.

Spanish Prime Minister Jose Luis Rodriguez Zapatero saidspeculation of a bailout for Spain is “complete madness” andthe nation has “strong solvency.” His remarks came as a 110billion-euro ($143 billion) rescue package to help Greece avoiddefault fails to ease concern that swelling sovereign debt willderail the economic recovery.

“Spain and Portugal are both endangered species,” saidStanley Nabi, New York-based vice chairman of Silvercrest AssetManagement Group, which manages $9 billion. “The attentioncould shift to one of those countries. In the U.S., it’s nolonger news that earnings are better than expected. The stockmarket has had a great run. I’ve got a feeling that May is goingto be a month of consolidation or even of backing down a littlebit.”

Rally Reversed

The S&P 500 erased yesterday’s rally and the cost to useoptions to protect against further declines in equities surgedas concern over European government debt overshadowed bigger-than-estimated growth in U.S. factory orders and pending homesales.

Alcoa Inc., Caterpillar Inc. and Hewlett-Packard Co. sankat least 3.8 percent to lead the Dow Jones Industrial Average toits biggest drop since February. Pfizer Inc. and Merck & Co.posted two of three gains in the 30-stock average. All 10 mainindustries in the S&P 500 retreated.

The benchmark index for U.S. stock options jumped to thehighest intraday level since February and Europe’s gauge rose tothe highest level since July. The VIX, as the Chicago BoardOptions Exchange Volatility Index is known, gained 22 percent to24.71. The index measures the cost of using options as insuranceagainst declines in the S&P 500. Europe’s VStoxx Index, whichgauges the cost of options to protect against losses in the EuroStoxx 50 Index, rose 15 percent to 33.146.

‘Triple Whammy’

News that a U.S. citizen originally from Pakistan will facecharges for the attempted May 1 car bombing in New York’s TimesSquare also weighed on U.S. stocks.

“It’s like a triple whammy,” said Michael Nasto, thesenior trader at U.S. Global Investors Inc., which manages about$2.5 billion in San Antonio. “The threat of terrorism just addsto investors’ concern about Europe’s debt situation and a Chinaslowdown. The more we hear about the car bomb suspects, the morewe get spooked, especially because it’s in New York.”

The cost to protect against defaults on U.S. corporatebonds rose. The Markit CDX North America Investment Grade IndexSeries 14, which investors use to hedge against losses oncorporate debt or to speculate on creditworthiness, increased2.4 basis points to a mid-price of 92.9 basis points as of 7:57a.m. in New York, according to Markit Group Ltd.

Spain’s IBEX 35 tumbled 5.4 percent to a 10-month low asBanco Santander SA, the nation’s biggest lender, fell 7.1percent in Madrid.

‘No Truth’

The extra yield investors demand to hold Spanish debtrather than German equivalents has risen this week as theEuropean Union’s rescue plan for Greece failed to insulate othereuro-area nations from the crisis. Even as Spain’s debt burden,at 53 percent of output, is lower than the EU average, itsbudget deficit is the euro region’s third-largest.

International Monetary Fund spokesman Bill Murray, in astatement released in Washington today, said there’s “notruth” to rumors about Spain.

“These rumors can increase the interest-rate differentialcompared with German bonds and damage our national interests,”Zapatero told a news conference in Brussels today. “This issimply intolerable and I can tell you that we will certainlycombat it.”

The premium, or spread, over German debt increased furtheras Zapatero addressed reporters, and reached 115 basis points,the highest in a year, compared with 97 basis points yesterday.

S&P last week cut Greece’s credit rating to the junk levelof BB+, lowered Spain by one level to AA and cut Portugal by twosteps to A-.

‘Shaking Things Up’

“The biggest concern today remains the European peripheralcountries and Spain is the big one because there’s fear ofanother downgrade,” said Sal Catrini, a managing director forequities at Cantor Fitzgerald & Co. in New York. “That’sshaking things up today.”

Yields on Spain’s 10-year debt climbed 8 basis points to4.11 percent, near the highest since February. Credit-defaultswaps on Spain rose 50 basis points to 207.8, while Portugaladded 71 to 346.6, CMA DataVision data showed.

The extra yield investors demand to own emerging-marketbonds over U.S. Treasuries swelled 19 basis points to 279 basispoints, the widest since March 4, according to JPMorgan Chase &Co.’s EMBI+ index.

Crisis ‘Escalated’

Greek bonds fell for the first time in four days, with theyield on the government’s 10-year bond rising 89 basis points to9.4 percent. Investors demanded an extra 645 basis points tohold Greek 10-year bonds instead of benchmark German bunds, upfrom 544 basis points yesterday. Credit-default swaps on Greecesurged 85 basis points to 731, according to CMA DataVisionprices, implying an almost 45 percent probability of defaultover five years.

“The crisis in Greece has escalated significantly inrecent days,” said Tristan Hanson, manager of asset allocationand strategy at Ashburton Ltd. in Jersey, Channel Islands.“Confidence in the long-term solvency of the Greek governmenthas collapsed. As ever, from a global financial marketsperspective, the big risk remains contagion.”

BHP Billiton Ltd. and Rio Tinto Group slumped more than 6.4percent on the first trading day in London since the Australiangovernment unveiled plans to impose heavier taxes on miningcompanies.

The MSCI Asia Pacific Index fell 0.6 percent to a five-weeklow. China Zhongwang Holdings Ltd., a maker of aluminumproducts, slid 4.5 percent in Hong Kong. Yanzhou Coal MiningCo., a Chinese energy company that paid more than $3 billion forAustralia’s Felix Resources Ltd., fell 2.9 percent.

The yen strengthened against 15 of its 16 most-tradedcounterparts, appreciating 1.5 percent versus the euro.

Thailand Gains

Thailand’s SET Index advanced 4.4 percent, the most in twoweeks, and the baht strengthened after Prime Minister AbhisitVejjajiva proposed a November election to help end the country’sworst political violence in 18 years.

The Shanghai Composite Index dropped 1.2 percent afterChina’s central bank ordered a third increase in banks’ reserverequirements this year and manufacturing growth slowed.

The S&P GSCI Index of commodities sank 3.1 percent, themost in three months.

Copper for July delivery fell 3.3 percent to $3.1840 apound in New York, the lowest since Feb. 12. Aluminum dropped4.1 percent in London, the first decline in four days. Crude oilretreated 4 percent to $82.72 a barrel in New York trading andlost as much as 4.1 percent, the most since Feb. 4.

To contact the reporters on this story:Rita Nazareth in New York at [e-mail];Jeff Kearns in New York at [e-mail].

Last Updated: May 4, 2010 15:39 EDT