U.S. Stocks Decline as Greek Referendum Threatens European Bailout Plans

By Rita Nazareth - Nov 1, 2011 9:53 PM GMT+0700

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Nov. 1 (Bloomberg) -- David Rovelli, managing director of U.S. equity trading at Canaccord Genuity Inc., discusses stock market performance amid concerns that a Greek referendum pledged by Prime Minister George Papandreou may threaten Europe’s bailout. Rovelli speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

U.S. stocks slumped, following the biggest decline in almost a month for the Standard & Poor’s 500 Index, on concern that a Greece referendum pledged by Prime Minister George Papandreou may threaten Europe’s bailout.

Stocks briefly pared losses after Germany and France’s leaders said Greece’s deal is “more necessary than ever.” Bank of America Corp. (BAC) and Citigroup Inc. (C) retreated more than 3.7 percent as a gauge of European lenders tumbled 6.4 percent. The Morgan Stanley Cyclical Index of companies most-tied to the economy lost 2.7 percent. Alcoa Inc. (AA) and Halliburton Co. (HAL) dropped at least 2.5 percent as commodity prices fell on demand concern.

The S&P 500 fell 2 percent to 1,228.57 as of 10:50 a.m. New York time, after dropping as much as 2.8 percent earlier. The benchmark gauge for U.S. equities slumped 2.5 percent yesterday. The Dow Jones Industrial Average declined 204.76 points, or 1.7 percent, to 11,750.25 today.

“I just don’t get it,” Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston, said in a telephone interview. “A Greek referendum is a very risky proposition and it’s very surprising. Everybody thought last week that this crisis was behind us on a near-term basis, but Europe is going to be front and center.”

The S&P 500 jumped 11 percent in October, the best monthly gain since 1991, after European leaders took action to contain the debt crisis. Equities trimmed monthly gains yesterday amid concern Europe will struggle to raise financing for a bailout.

Trading Range

Today’s decline cut the S&P 500’s price to 12.9 times reported earnings, the lowest since Oct. 20 and 22 percent below its five-decade average of 16.4, according to data compiled by Bloomberg. The index is trading just above the level where three rallies stopped in August and September, the top of a so-called trading range that prevailed for 10 weeks.

Global stocks sank today as a gauge of European shares dropped 3.3 percent. Papandreou’s gambit risks pushing the country into default if rejected by voters, and raises the ante with dissidents in his own party. Equity futures extended losses after state-run Athens News Agency reported, without citing anyone, that six senior members of the ruling party called on Papandreou to step down.

“The bailout and austerity measures are hugely unpopular among the Greek people,” Andrew Ross, a partner and global equity trader at First New York Securities LLC, a New York-based proprietary trading firm that bets on stocks, commodities and derivatives, said in an e-mail. “In the event Greek people opt out of the bailout program, Greece will default and an extremely ugly precedent will set for Italy, Portugal and Spain.”

Group of 20

German Chancellor Angela Merkel and French President Nicolas Sarkozy called for the implementation of a European deal to write down Greece’s debt. The two will meet in Cannes tomorrow to discuss Greece before a Group of 20 summit starting in the French city on Nov. 3, Merkel’s chief spokesman Steffen Seibert said in an e-mailed statement.

American banks tumbled. Bank of America retreated 3.7 percent to $6.58. Citigroup declined 5.4 percent to $29.88.

U.S. regulators are investigating whether hundreds of millions of dollars are missing from client accounts at MF Global Holdings Ltd., according to two people with knowledge of the matter. The firm, which filed for bankruptcy protection yesterday, was ordered by the enforcement division of the Commodity Futures Trading Commission to preserve records for the review, one of the people said.

Chinese Manufacturing

Stocks also fell after data showed a Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world’s second-biggest economy.

In the U.S., the Institute for Supply Management’s factory index fell to 50.8 in October from 51.6 the prior month, the Tempe, Arizona-based group said today. A reading of 50 is the dividing line between expansion and contraction in manufacturing.

Companies most-tied to the economy declined. Caterpillar Inc. (CAT) fell 3.1 percent to $91.56 and Hewlett-Packard Co. (HPQ) slumped 3.6 percent to $25.65. The Dow Jones Transportation Average, a proxy for the economy, slid 1.4 percent.

Concern about slower demand for commodities drove energy and raw material shares in the S&P 500 down by at least 2.4 percent. Alcoa erased 2.5 percent to $10.49. Halliburton sank 5.9 percent to $35.15.

Baker Hughes Inc. tumbled 9.8 percent to $52.29. The oilfield contractor reported third-quarter earnings excluding some items of $1.18 a share, missing the average analyst estimate by 3 percent, according to Bloomberg data.

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