Stocks Tumble on Greek Debt Concern; Bunds Gain, Euro Rallies

Friday, May 7, 2010
By Paul Martin

By Mark Gilbert

May 7 (Bloomberg) — Stocks slumped worldwide on concern Europe’s debt crisis will worsen, while Standard & Poor’s 500 Index futures rallied after U.S. stocks dropped by the most in a year. German bunds gained as investors sought a haven from surging Greek debt yields.

The Stoxx Europe 600 Index fell 1.6 percent at 11:57 a.m. in London, after touching its lowest intraday level in three months. The euro rallied from its weakest value in more than a year against the dollar, while the 10-year bund yield declined 3 basis points to 2.76 percent as the yield premium on Greek debt climbed to a record. The rout in U.S. stocks briefly erased more than $1 trillion in market value as the Dow Jones Industrial Average lost 9.2 percent, before closing 3.2 percent lower.

“Anxiety is getting worse,” Bob Parker, a London-based adviser to Credit Suisse Asset Management, which oversees about $414 billion, said in a Bloomberg Television interview. “Markets are highly concerned about the contagion effect. There’s been nothing to calm market fears.”

Stocks were pummeled amid concern European leaders won’t do enough to keep the most indebted nations from defaulting after a 110 billion-euro ($140 billion) rescue package for Greece failed to halt a rise in government borrowing costs. U.S. losses snowballed as computerized trades caused some stocks to briefly lose more than 90 percent of their value. Japanese Finance Minister Naoto Kan said the Group of Seven will hold a conference call to discuss the Greek debt crisis.

Banks Drop

The MSCI World Index dropped for a fourth day, losing 0.6 percent. Europe’s Stoxx 600 index has retreated 11 percent from this year’s high on April 15. Credit Agricole SA led European bank shares lower after saying its corporate and investment bank has 2.4 billion euros at risk in Greek assets. Royal Bank of Scotland Group Plc slid as much as 7 percent after reporting a first-quarter loss.

The MSCI Emerging Markets Index dropped 1.7 percent, extending this week’s retreat to 8.7 percent, the biggest decline since Feb. 20, 2009. Japan’s Nikkei 225 Index slipped 3.1 percent and the MSCI Asia Pacific Index lost 1.7 percent. The benchmark global, European and Asian indexes have all wiped out their 2010 advances.

The yield on Greece’s 10-year note climbed 110 basis points to 12.76 percent, driving the yield premium to German debt to a record 966 basis points. Yields on Spanish, Italian and Portuguese debt also rose, extending a jump in borrowing costs after European Central Bank President Jean-Claude Trichet yesterday held interest rates at a record low of 1 percent and said the bank didn’t discuss whether to purchase government bonds to stem the region’s debt crisis.

Futures Rally

Futures on the S&P 500 swung between gains of as much as 0.9 percent and losses of 0.8 percent, and were recently 0.9 percent higher. The index yesterday fell as much as 8.6 percent, its biggest intraday drop since December 2008, before closing down 3.2 percent at 1,128.15. Employment in the U.S. probably grew in April for the third time in four months, driving payrolls up by 190,000 workers last month, according to the median forecast of 84 economists surveyed by Bloomberg News. The report is scheduled for 8:30 a.m. in Washington.

The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said they will examine “unusual trading” that contributed to the plunge. Two people with direct knowledge of the matter said regulators plan to examine whether securities professionals triggered the selloff or exploited it for profit. The Nasdaq OMX Group Inc. said it will cancel trades of stocks that moved more than 60 percent.

Euro Rallies

The euro strengthened against 15 of its 16 most traded counterparts after Japan’s Kan said at a press conference in Tokyo that European members in the G-7 “will probably explain” steps taken with the International Monetary Fund to assist Greece. The euro gained 1 percent against the dollar and 2.9 percent versus the yen.

“Nerves are frayed,” said Prasad Patkar, who helps manage about $1.7 billion at Platypus Asset Management Ltd. in Sydney. “After the global financial crisis, it’s not irrational for investors to shoot first and ask questions later. We need the ECB to come out decisively and put a stop to this before things spin out of control.”

The pound fell to a 13-month low as results from the U.K. election put the Conservatives on course to win the most seats, without gaining an overall majority, fueling concern a new government won’t be strong enough to tackle the budget deficit.

Money-Market Rates

The bond and stock market turmoil is spilling over into money markets. Overnight deposits at the ECB rose to a 10-month high as the sovereign debt crisis made commercial banks reluctant to lend to each other. Banks yesterday lodged 290 billion euros in the central bank’s ECB’s overnight facility at 0.25 percent, up from 288 billion euros the previous day. That’s the most since July 3 last year. Deposits have exceeded 200 billion euros for the past 10 days.

The cost of borrowing dollars between banks for three months in London climbed to the highest level since August. The London interbank offered rate, or Libor, rose to 0.428 percent from 0.374 percent, according to the British Bankers’ Association.

The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers soared as much as 40 basis points to 223, according to JPMorgan Chase & Co. The index closed at 212 on March 9, 2009. Swaps on Greece, Portugal, Spain and Italy rose to or near all-time high levels.

The benchmark index for European stock options jumped to the highest level since April 2009. The VStoxx Index, which measures options on the Euro Stoxx 50 Index, rose 14 percent to 42.02. The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped the most since September 2008 after the close of European exchanges yesterday.

Copper for delivery in three months fell 0.6 percent on the London Metal Exchange, declining for a fourth day. Aluminum, nickel and zinc also retreated. Gold for immediate delivery was 0.5 percent lower at $1,202.60 an ounce in London, having touched $1,210.70 yesterday, within 1.3 percent of the record reached in December. Crude oil for June delivery rose 0.9 percent to $77.83 a barrel in New York trading, paring some of yesterday’s 3.6 percent slump.

The stock-market turmoil battered initial public offerings. Ron Burkle’s Americold Realty Trust postponed the largest U.S. initial public offering of 2010, with a mooted size of $660 million, while Hong Kong’s Swire Properties Ltd. shelved its $2.7 billion sale.

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