Stocks, Euro Weaken as Germany Damps Expectations on Debt-Crisis Solution

By Rob Verdonck and Rita Nazareth - Oct 18, 2011 3:29 AM GMT+0700

Global stocks and the euro fell, retreating after their best weekly gains in more than two years, as Germany damped expectations for a fast resolution to Europe’s debt crisis and a report showed New York-area manufacturing shrank more than forecast. Treasuries advanced.

The Standard & Poor’s 500 Index slid 1.9 percent to 1,200.86 at the 4 p.m. close in New York as Wells Fargo & Co. sank after reporting a drop in revenue. The MSCI All-Country World Index slipped 1.2 percent following last week’s 5.4 percent rally. The euro, which strengthened 3.8 percent versus the dollar last week, weakened 1.1 percent against the U.S. currency today. Lead, coffee and gasoline led losses in materials tracked by the S&P GSCI Index. Treasury 10-year notes rose, pushing yields down nine basis points to 2.16 percent

Equities and the euro headed lower as Steffen Seibert, German Chancellor Angela Merkel’s chief spokesman, said European Union leaders won’t provide the quick ending to the debt crisis that global policy makers are pushing for at an Oct. 23 summit. Optimism that the region’s officials were developing a plan to help banks weather losses on sovereign debt propelled gains in stocks and the euro last week.

“It’s optimism punctuated by reality,” said Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management Inc., which oversees $51.6 billion. “It’s not in the Germans’ interest to offer up a bailout package on the terms that the market would like.”

Finance ministers and central bankers from the Group of 20 nations concluded weekend talks in Paris by endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion. They set the Oct. 23 meeting of European leaders in Brussels as the deadline.

Retreat After Weekly Rally

The S&P 500 fell after last week’s 6 percent surge, its best gain since July 2009. Wells Fargo slumped 8.4 percent, the most in more than two months, as the largest U.S. home lender reported a drop in third-quarter revenue and narrower margins, even as profit climbed 22 percent to a record $4.06 billion. Citigroup Inc. fell 1.7 percent, erasing an early rally of as much as 3.8 percent. Profit at the bank rose 74 percent, beating analysts’ estimates, following a $1.9 billion accounting gain that reduced the impact of lower trading and investment-banking revenue.

Alcoa Inc., Hewlett-Packard Co. and 3M Co. sank at least 3.8 percent to lead declines in all 30 stocks in the Dow Jones Industrial Average, which tumbled 247.49 points, or 2.1 percent, to 11,397. El Paso Corp. (EP) surged 25 percent, the most in nine years, as Kinder Morgan Inc. agreed to buy the company for $21.1 billion in a deal that would create the largest U.S. natural-gas pipeline network.

International Business Machines Corp. lost 3.3 percent in extended trading after reporting revenue that trailed analyst estimates.

Trading Range

The S&P 500 is still up 9.3 percent from a 13-month low on Oct. 3 and ended last week at 1,224.58, above levels where rallies stopped in August and September. The gauge closed at 1,218.89 on Aug. 31 before dropping 4.4 percent in the next three sessions, and ended at 1,216.01 on Sept. 16 before losing 7.1 percent by Sept. 22. The index has fluctuated intraday between a high of 1,230.71 and a low of 1,074.77 since Aug. 5.

The Federal Reserve Bank of New York’s general economic index rose to minus 8.5 from minus 8.8 in September. Economists projected an improvement to minus 4, based on the median forecast. Readings less than zero signal companies in the New York, northern New Jersey, and southern Connecticut region are cutting back. A separate report showed U.S. industrial production advanced 0.2 percent in September on growing demand for automobiles and computers, matching economists’ estimates.

Commodities, Dollar

Copper fell from a three-week high, slipping 1.9 percent to $3.3430 a pound in New York. Lead, Brent crude oil, coffee and gasoline dropped at least 2 percent lead declines in 18 of 24 commodities tracked by the S&P GSCI. The commodities index slipped 0.8 percent after surging 5.2 percent last week, its biggest gain of the year.

The euro weakened to $1.3728. The dollar strengthened against 13 of 16 major peers and the Dollar Index, a gauge of the currency against six major peers, increased 0.8 percent to 77.237.

The yield on the U.S. 30-year Treasury bond fell 11 basis points to 3.13 percent.

The cost to protect U.S. bank debt climbed. Credit-default swaps on Wells Fargo, based in San Francisco, added 7 basis points to 152 basis points at 11 a.m. in New York, according to data provider CMA. Those tied to Goldman Sachs Group Inc. climbed 22.5 basis points to 361. A benchmark gauge of U.S. corporate credit risk also rose.

European Equities

About seven stocks declined for each that gained in the Stoxx Europe 600 Index, which retreated 1 percent after gaining for three straight weeks. Automobile companies led losses, with Daimler AG and Bayerische Motoren Werke AG down more than 3 percent. BP Plc appreciated 2.2 percent after saying Anadarko Petroleum Corp. will pay $4 billion to settle all claims over last year’s oil spill in the Gulf of Mexico.

Benchmark German 10-year bunds rose, sending their yields down 10 basis points to 2.098 percent. The yield on 10-year French debt widened to a record 95.6 basis points above German bunds.

Ten-year Spanish bond yields advanced for a sixth day, adding seven basis points to 5.32 percent.

The yield on the Portuguese 10-year security rose 14 basis points to 11.79 percent, with seven days of losses in the bond driving the level up from 11.21 percent.

Emerging Markets

The MSCI Emerging Markets Index increased 0.1 percent for a ninth straight gain, the longest winning streak in 16 months. The Hang Seng China Enterprises Index of Chinese shares traded in Hong Kong climbed 2.8 percent and the Kospi Index (KOSPI) jumped 1.6 percent in Seoul. South Korea’s won climbed against all 16 major peers.

South Korean Finance Minister Bahk Jae Wan said at the Paris meeting the Asian nation’s economy is performing better than expected, while data tomorrow may show China’s gross domestic product increased 9.3 percent in the third quarter from a year earlier, according to the median estimate of 22 economists surveyed by Bloomberg. That would be the ninth consecutive quarter of expansion above 9 percent.

A U.S. Senate vote to punish China for depressing its currency is the latest legislative ritual in which the message may be as important as the proposed sanction. U.S. House Speaker John Boehner practically declared the measure dead on arrival in the Republican-run chamber after the Senate’s 63-35 vote last week to let U.S. manufacturers seek duties on Chinese imports if they prove they were harmed by manipulation of the yuan. Boehner, of Ohio, voiced “grave concerns” the measure may trigger a trade war.

To contact the reporters on this story: Rob Verdonck in London at rverdonck@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net