Stocks Drop as Euro Weakens; Bonds Rise in Spain, Italy Before Debt Sales

By Stephen Kirkland and Lynn Thomasson - Jan 11, 2012 9:31 PM GMT+0700

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Jan. 11 (Bloomberg) -- Boaz Weinstein, founder of Saba Capital Management LP, says 2012 may be a "confusing year" for markets. Stephanie Ruhle reports on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Stocks fell, pulling U.S. benchmark indexes down from five-month highs, and the euro weakened as concern deepened that Europe's debt crisis will stifle economic growth and Microsoft (MSFT) Corp. damped expectations for computer sales. Commodities slid, while Spanish and Italian bonds rose.

The Standard & Poor’s 500 Index slipped 0.2 percent at 9:30 a.m. in New York, retreating from the highest level since July 29, and the Stoxx Europe 600 Index lost 0.5 percent. The euro depreciated 0.6 percent to $1.2702. The yield on the Spanish 10- year bond dropped 20 basis points, declining for the third day, while the extra yield investors demand to own similar-maturity Italian debt instead of benchmark German bunds slid 17 basis points to 3.43 percentage points. Natural gas sank.

Germany’s Federal Statistics Office said the economy probably shrank in the fourth quarter from the third, and the European Union cut euro-area growth to 0.1 percent in the third quarter, from 0.2 percent estimated earlier. The U.S. Federal Reserve is scheduled to release its Beige Book survey of economic conditions today. Spain and Italy will sell as much as 17 billion euros ($22 billion) in debt tomorrow.

“We see Europe deteriorating this year with the economy moving formally into recession,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp., Australia’s second-largest lender. The euro-area economy will probably contract 0.2 percent this year, according to the median of 21 estimates in a Bloomberg survey of economists.

Microsoft slid after the world’s largest software maker said industry-wide sales of personal computers will probably be lower than analysts projected in the fourth quarter because supply was hurt by flooding in Thailand.

Weak Demand

European stocks pared declines after German Chancellor Angela Merkel said her nation is prepared to contribute more upfront capital to the the permanent European rescue effort and the region’s central bank will help advise the temporary bailout fund. Royal Dutch Shell Plc dropped 2.9 percent, leading energy producers lower, as oil declined. Pirelli & C. SpA fell 3.8 percent after Goodyear Tire & Rubber Co. said it’s experiencing weakness in global demand.

Chr. Hansen Holding A/S climbed 12 percent after Novo A/S agreed to buy a 26 percent stake in the Danish maker of food ingredients.

Oil dropped 0.8 percent to $101.41 a barrel in New York. The S&P GSCI index of 24 commodities lost 0.4 percent. Natural gas futures in New York dropped as much as 4.8 percent to $2.801 per million British thermal units, the lowest price since September 2009.

Hungary Funding

The MSCI Emerging Markets Index slipped 0.1 percent, reversing earlier gains. Benchmark gauges in Hungary and the Czech Republic lost more than 1 percent. Hungary’s forint slipped 0.5 percent as the European Commission said the nation faces suspension of some of its funding and possible sanctions for breaching deficit targets and for laws that may contravene European Union rules.

The euro weakened against all but two of its 16 major counterparts, declining 0.4 percent versus the yen. The Dollar Index rose 0.6 percent.

The ECB should ramp up euro area bond purchases to support Italy and prevent “cataclysmic” collapse of euro, Fitch Ratings head of sovereign ratings David Riley said, Reuters reported.

The yield on the German five-year note fell five basis points to 0.78 percent. The country sold 3.153 billion euros of five-year debt after receiving 8.97 billion euros of bids. Its maximum sales target was 4 billion euros.

Debt Sales

Spain auctions as much as 5 billion euros of 2015 and 2016 securities tomorrow, with Italy selling as much as 12 billion euros of bills tomorrow and as much as 4.75 billion euros of bonds in two days. The yield on the Greek two-year note tumbled 19.5 percentage points to 165.09 percent.

The U.K. sold 3 billion pounds ($4.6 billion) of September 2021 bonds today, while the U.S. auctions $21 billion of 10-year notes.

Ireland could be the first of three bailed-out euro area countries to return to the sovereign bond market in six to 12 months, Reiner Back, head of fixed income and currency portfolio management at Munich Re’s MEAG asset-management unit, said in Frankfurt today.

Borrowers from Indonesia to South Africa and Brazil tapped the debt markets for more than $30.6 billion so far this year, a record start for dollar-denominated bond sales by developing- nation issuers.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net

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