Stocks in U.S. Tumble as Italian Bond Yields Increase to Euro-Era Records

By Rita Nazareth - Nov 9, 2011 10:10 PM GMT+0700

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U.S. stocks slumped, following a two- day advance in the Standard & Poor’s 500 Index, as a surge in Italian bond yields to euro-era records bolstered concern that Europe’s sovereign debt crisis is worsening.

Bank of America Corp. (BAC) and Morgan Stanley tumbled at least 3.1 percent, following losses in European lenders, after LCH Clearnet SA raised the extra charge it levies on clients for trading Italian government bonds and index-linked securities. General Motors Co. (GM) slumped 8.4 percent after abandoning its target for European results. Adobe Systems Inc. (ADBE) sank 12 percent on plans to cut jobs as it lessens its focus on older products.

The S&P 500 sank 2.5 percent to 1,243.88 as of 10:10 a.m. New York time, after rising 1.8 percent over the previous two days. The Dow Jones Industrial Average lost 272.50 points, or 2.2 percent, to 11,897.68. The Stoxx Europe 600 Index decreased 2 percent, erasing an earlier advance, as the 10-year Italian note yield topped 7 percent for the first time in the euro era.

“It’s just like a scary movie as it never ends,” Keith Wirtz, who oversees $16.7 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a telephone interview. “The overarching problem is that most of the economies in Europe can’t sustain the size of their governments. We’re going to have this headache for a long time to come. That’s what’s causing angst.”

The so-called deposit factor for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, the French unit of LCH Clearnet said in a document dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7.

Protect Against Losses

Clearing houses guarantee that investors’ trades are completed by standing in the middle of two counterparties, and raise margin requirements to protect themselves against losses should one side of the trade fail.

Stocks rose yesterday as Prime Minister Silvio Berlusconi’s offer to resign boosted optimism Italy would appoint a new leader who can tame the debt crisis. Greek Prime Minister George Papandreou’s talks on forming an interim government dragged into a third day as a near-agreement with the biggest opposition party stalled on European demands for written commitments.

“The Greek flu is hitting Italy,” James McDonald, chief investment strategist at Northern Trust Corp. in Chicago, which manages $643 billion, said in a telephone interview. “The pressures on the political system have led to Berlusconi’s resignation, and now the market says -- this is fine and dandy, but who’s going to be the new leadership? Until they know that and the new leadership’s willingness to implement reforms, they are going to require higher compensation through higher yields on Italian bonds. The risk is that this feeds on itself.”

Banks Tumble

American banks tumbled as a gauge of European lenders sank 4.2 percent. The KBW Bank Index sank 3.5 percent as all 24 stocks retreated. Bank of America lost 3.1 percent to $6.33. Morgan Stanley (MS) retreated 6.4 percent to $16.22.

General Motors slumped 8.4 percent to $22.93. The automaker, which hasn’t turned an annual profit in Europe in more than a decade, fell after rescinding its target for break- even results in the region. Europe operations lost $292 million before interest and taxes in the quarter.

GM said it no longer expects to break even on an EBIT basis before restructuring costs in Europe, citing “deteriorating economic conditions.”

Adobe slumped 12 percent to $26.88. The reduction of 750 jobs, mostly in North America and Europe, will cost $87 million to $94 million before taxes, the company said. After the costs, net income will be 30 cents to 38 cents a share, compared with a previous forecast of 41 cents to 50 cents.

Thwart Recovery

Concern that Europe’s debt crisis may thwart a global economic recovery sent the Morgan Stanley Cyclical Index down 3.3 percent. The Dow Jones Transportation Average of 20 stocks slumped 2.7 percent. FedEx Corp. (FDX), operator of the world’s biggest cargo airline, slipped 3.2 percent to $80.35. Apple Inc. (AAPL), the biggest technology company, lost 2.1 percent to $397.68.

Energy and raw material producers dropped as the dollar rose, reducing the appeal of commodities. Alcoa Inc. (AA), the largest U.S. aluminum producer, slid 3.7 percent to $10.39. Chevron Corp. (CVX) fell 3.1 percent to $105.52.

The S&P 500 may halt its biggest gain in 20 years, according to two indicators studied by technical analysts at UBS AG. October’s 11 percent rally, which was the biggest monthly advance since 1991, failed to leave the S&P 500 above its 200- day average, limiting the potential for a rally, the Zurich- based analysts wrote in a report yesterday.

The team also said their model for moving average convergence-divergence, or MACD, is heading into “bear mode.”

“We see the risk of more near-term weakness into next week,” Marc Muller and Michael Riesner wrote in the report. “Given the high volatility, we would see a pullback into next week still as a trading opportunity for aggressive traders, whereas, on the upside, we wouldn’t chase the market.”

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net