Stocks Decline on Dimming EU Summit Hopes

By Nikolaj Gammeltoft - Dec 7, 2011 9:32 PM GMT+0700

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Dec. 7 (Bloomberg) -- Scott Clemons, chief investment strategist at Brown Brothers Harriman & Co., talks about the outlook for the U.S. economy and investment strategy. Clemons speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

U.S. stocks fell, following a two-day advance for the Standard & Poor’s 500 Index, amid growing pessimism that European leaders will reach agreement on measures to ease the debt crisis at a summit this week.

The S&P 500 lost 0.5 percent to 1,252.66 at 9:31 a.m. New York time. The benchmark gauge for American equities rose 1.1 percent over the previous two sessions.

“Markets reflect that it’s pretty high stakes in Europe,” Charles Reinhard, who helps oversee about $1.7 trillion as deputy chief investment officer at Morgan Stanley Smith Barney LLC in New York, said in a telephone interview. “It’s important that Europe is able to integrate fiscal policy, shore up the banks and that monetary policy eases.”

Stock futures pared gains after a German government official said the country rejects proposals to combine the current and permanent euro-area rescue funds. It is already decided that the permanent European Stability Mechanism will take over from the current rescue fund at an appointed time, a German official said on condition of anonymity. Germany will oppose any attempt to change that, the official said.

The ECB may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations. Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans, said the officials, who spoke on condition of anonymity.

Rewriting Treaties

German Chancellor Angela Merkel and French President Nicolas Sarkozy will argue for rewriting European Union treaties to tighten control of national budgets at the meeting in Brussels tomorrow and on Dec. 9.

The S&P 500 has struggled to make any headway this year, rising less than 0.1 percent (SPX), as the euro area’s debt crisis spread to the 17-nation currency’s larger economies. Still, the gauge is the only major developed equity market of 24 tracked by Bloomberg that hasn’t fallen this year.

Never before has the euro influenced U.S. stocks as much as this year, a sign that American equities aren’t going anywhere until Europe’s credit crisis is solved.

The link between the Dow average and swings in the currency reached a record on Dec. 2, according to data compiled by Bloomberg. The so-called correlation coefficient showing how much two markets rise and fall in tandem hit 0.85, the highest level since the euro was founded in 1999, data on 60-day rolling averages show. A reading of 1 means assets are moving in lockstep.

Highest Rating

International investors awarded the U.S. its highest rating in more than two years on optimism that the world’s largest economy will weather the financial crisis in Europe and avoid a recession in 2012, according to a Bloomberg poll.

More than two in five of those surveyed -- 41 percent -- identify the U.S. as among the markets that will perform best over the next year. That’s up from less than one in three who felt that way in September and is the biggest percentage for the U.S. since the survey began in October 2009. It’s also almost double that of the next two top-rated markets, Brazil and China, according to the quarterly Bloomberg Global Poll conducted on Dec. 5-6 of 1,097 investors, analysts and traders who are Bloomberg subscribers.

“We are hopeful that increasingly loose monetary policy across the globe can result in a reacceleration of growth for export-driven companies in the U.S. by the second half” of next year,’’ said Scott Migliori, the San Francisco-based chief investment officer for the U.S. at RCM, which has about $128.2 billion in assets under management. “Any resolution of global growth concerns and/or clarity on post-election policy in the U.S. could result in a significant re-rating of U.S. equities towards the year end, even in the face of decelerating profit growth.”

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net