By Stephen Kirkland and Shiyin Chen - Sep 22, 2011 6:43 PM GMT+0700
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Traders work at the New York Stock Exchange in New York. Photographer: Scott Eells/Bloomberg
Sept. 22 (Bloomberg) -- Jim Millstein, former chief restructuring officer at the U.S. Treasury, talks about Moody's Investor Service's downgrade of the credit ratings of Bank of America Corp. and Wells Fargo & Co., government bailouts and the outlook for U.S. banks. He speaks with Erik Schatzker and Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Stocks and commodities tumbled, Treasury 30-year yields dropped to a record and the Dollar Index climbed to a seven-month high as the Federal Reserve signaled “significant downside risks” in the U.S. economy.
The MSCI All-Country World Index retreated 2.5 percent at 7:41 a.m. in New York, extending declines from its May peak to more than 20 percent. The U.K.’s FTSE 100 Index (UKX), France’s CAC-40 Index (CAC) and Germany’s DAX slid at least 4.3 percent and Standard & Poor’s 500 Index futures lost 2.2 percent. Thirty-year Treasury yields fell to 2.8462 percent, with German 30-year yields also dropping to an all-time low. The Dollar Index rose as much as 1.6 percent, while the euro lost 1 percent against the U.S. currency. Commodities erased their gains for the year.
The Fed said yesterday it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth as the recovery falters two years after the biggest slump since the Great Depression. China’s manufacturing may shrink for a third month in September, a preliminary index of purchasing managers from HSBC Holdings Plc and Markit Economics showed today. The biggest risk to the euro area is a run on southern European banks, said Kenneth Rogoff, a former chief economist at the International Monetary Fund, Handelsblatt reported.
“The fact that the outlook has not improved despite QE1 and QE2 tells me that monetary policy is reaching its limit and fiscal measures have to do the heavy lifting,” said Manish Singh, London-based head of investment at Crossbridge Capital, which has more than $2 billion under management. “So far, what we have got from the Congress is only disappointment and half- baked measures. If we get more of the same, the downside risk to the markets amplifies.”
Bear Market
A close at this level for the MSCI’s index of developed and emerging-market stocks will mean the gauge has entered a bear market. The Stoxx Europe 600 sank 4.3 percent today as all 19 industry groups declined at least 2.5 percent. Mining companies and automakers led the retreat. Logitech International SA dropped 13 percent after the world’s biggest maker of computer mice cut its profit forecast.
The cost of insuring European corporate debt surged to the highest in 2 1/2 years, with the Markit iTraxx Crossover Index of default swaps on 50 companies with mostly high-yield credit ratings rising 43.5 basis points to 848.5, according to JPMorgan Chase & Co.
“We have negative headwinds that are absolutely massive,” Patrick Legland, the Paris-based head of research at Societe Generale SA, said in a Bloomberg Television interview with Francine Lacqua in London. “There’s a very powerful slowdown and maybe a recession for Europe and the U.S.”
Bank Downgrades
The decline in S&P 500 futures indicated the U.S. equities gauge will extend a three-day, 4.1 percent decline. The index slumped 2.9 percent yesterday after Moody’s Investors Service cut its long-term credit ratings on Bank of America Corp. and Wells Fargo & Co., saying U.S. support has become less likely if lenders get into financial trouble. Citigroup Inc.’s short-term rating also was downgraded by Moody’s.
The Dollar Index, which tracks the U.S. currency against those of six trading partners, advanced to 78.539, after climbing to 78.575, the highest level since Feb. 16. The 17- nation euro depreciated as much as 1.1 percent against the yen to the lowest level since June 2001, and reached the weakest level since February versus the greenback.
“The euro zone is in meltdown and investors are bailing out of risk wherever they can,” said Steven Barrow, head of research for Group of 10 currencies at Standard Bank Plc in London, referring to yesterday’s statements by the Fed and the Bank of England. “The fact that the Fed delivered mo more than the market expected was probably seen as a disappointment.”
Aussie, Kiwi
The Australian dollar slid below parity with its U.S. peer for the first time in more than six weeks, falling as much as 1 percent. New Zealand’s dollar sank 1.6 percent against the U.S. currency as a report showed the economy almost stalled in the second quarter, reinforcing the case for central bank Governor Alan Bollard to maintain record-low interest rates until 2012. Gross domestic product rose 0.1 percent in the period from the first quarter, a Statistics New Zealand report showed today in Wellington. The median estimate was for a 0.5 percent gain.
The yield on the 10-year Treasury note declined as much as six basis points to 1.7944, the lowest on record. The difference in yield between two- and 30-year debt was as little as 266 basis points, the least since March 2009. The German 30-year yield dropped as much as 15 basis points to 2.45 percent, with the 10-year bund yield sliding to 1.667 percent, the least on record.
Yield Spreads
The extra yield investors demand to hold Italian 10-year bonds instead of bunds approached a euro-era record 4.16 percentage points and was at 4.03 percentage points as the European Central Bank bought Italian government bonds today, according to four people with knowledge of the transactions. A spokesman for the Frankfurt-based central bank declined to comment. Greek two-year notes rose for the first time in four days, sending the yield down 13 basis points to 66.38 percent.
The S&P GSCI index of 24 commodities fell 2.8 percent, bringing the drop this year to 1.7 percent. Copper declined 4.9 percent in London, and crude oil in New York retreated 3.4 percent to $82.97 a barrel.
The MSCI Emerging Markets Index sank 4.5 percent, the most in a month. Indonesia’s Jakarta Composite Index (JCI) slumped 8.9 percent, the biggest loss since October 2008, and benchmark indexes fell more than 3 percent in Russia, India, Poland, Hungary and Taiwan. The Shanghai Composite Index slid 2.8 percent after the manufacturing gauge declined and the government said it will broaden taxes levied on resources. South Korea’s won led currencies lower, depreciating 2.5 percent against the dollar.
To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Shiyin Chen in Singapore at schen37@bloomberg.net
To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net
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