Stocks, Commodities, Dollar Drop

Stocks, Commodities, Dollar Drop on Concern Recovery Is Slowing

By Nikolaj Gammeltoft and Stephen Kirkland

July 1 (Bloomberg) -- Stocks, commodities and the dollar slumped as data on manufacturing, jobless claims and home sales fueled concern the economic recovery is faltering. The yen surged to a seven-month high versus the U.S. currency.

The Standard & Poor’s 500 Index fell for the fourth straight day, losing 0.3 percent to 1,027.37 at 4 p.m. in New York, its lowest close since Oct. 2, 2009, after sinking as much as 1.9 percent earlier. The MSCI World Index of 24 developed nations slipped 0.4 percent to a 10-month low. Oil and copper tumbled at least 2.5 percent. The euro rallied against the dollar as a Spanish bond sale met targets and pessimism surrounding European banks diminished. Gold tumbled.

The slide in riskier assets came as reports showed manufacturing growth slowed in China, Europe and the U.S., while American jobless claims unexpectedly rose to 472,000 last week. Pending sales of existing U.S. homes fell at twice the rate economists forecast as the absence of a tax credit hurt demand. The S&P 500 has lost 16 percent from its 2010 high and yesterday completed its first quarterly drop in more than a year.

“It’s a data-dependent market, the leading indicators are turning down and growth is slowing,” said Mike Morcos, senior money manager at Old Second Wealth Management in Aurora, Illinois, which oversees about $1.1 billion. “It now turns out the recovery is weaker than the market thought earlier in the year.”

Bank Estimates

Financial shares in the S&P 500 slumped 0.9 percent as a group, extending their loss since April 14 to 19.9 percent, after Bank of America Corp. analysts reduced second-quarter earnings estimates for Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc.

U.S. equities trimmed declines in afternoon trading amid speculation the recent drop has made stocks cheap compared with earnings. The S&P 500’s price-to-earnings ratio has decreased to less than 15, its lowest level in about a year.

At its low for the day, the S&P 500’s was trading with a PEG ratio, or its price-earnings multiple using 2009 profit divided by forecast income growth over the next three years, of 0.78, according to data compiled by Bloomberg. The indicator was a favored tool of Fidelity Investments fund manager Peter Lynch who claimed stocks trading with a PEG as high as 1 were fairly valued.

Stock returns trailed bonds by the widest margin in nine years during the first six months of 2010 on signs growing government budget deficits may stunt the global economic recovery. A monthly Labor Department report on non-farm payrolls tomorrow is forecast to show the unemployment rate probably rose in June as the U.S. lost jobs for the first time this year.

Yield Curve

The extra yield investors demand to hold Treasury 10-year notes over 2-year debt fell to the lowest level since October amid concern the slowing rebound will trigger deflation.

The 10-year note yield stayed below 3 percent for a third day after breaching that level this week for the first time in more than a year. The difference between 10- and 2-year note debt, known as the yield curve, dropped for a fourth day to 2.32 percentage points and touched 2.28 percentage points, the lowest level since Oct. 2.

“The information is horrific and expectations for how weak the economy is have been underestimated,” said Thomas Tucci, head of U.S. government bond trading at Royal Bank of Canada in New York, one of 18 firms that trade directly with the Federal Reserve. “The market is defensive because of expectations for non-farm payrolls. Construction numbers, housing numbers and other numbers have all been horrific.”

Euro Rallies

The euro rallied 2.4 percent to $1.2531, the most since May 10. The European Central Bank said it will lend banks 111.2 billion euros ($136.5 billion) for six days to help them cope with the expiration of its landmark 12-month loan today. Banks need to repay 442 billion euros in 12-month loans, the biggest amount ever awarded by the ECB. Banks asked for 131.9 billion euros in three-month loans yesterday, less than economists expected.

Spain sold 3.5 billion euros ($4.3 billion) of five-year notes, with demand falling to 1.7 times the amount of securities offered, from 2.35 times at the previous auction on May 6. The notes were sold at an average yield of 3.657 percent, compared with 3.532 percent a May 6 auction. The country’s top credit ranking yesterday was put on review for a possible cut by Moody’s Investors Service, which cited “deteriorating” growth prospects, challenges in meeting deficit targets and the risks posed by higher borrowing costs.

“They did fill it at pretty much the maximum of their guidance, and when you consider the backdrop, you’d have to say that’s encouraging,” Sean Maloney, a fixed-income strategist at Nomura International Plc in London, said of Spain’s bond sale.

The dollar retreated against 12 of 16 major currencies, losing 1 percent to 87.59 yen.

Europe, Asian Stocks

More than 11 shares declined for every one that advanced in the Europe’s Stoxx 600 Index, which slumped 2.5 percent. Deutsche Bank AG, Germany’s biggest bank, and Credit Agricole SA of France lost at least 3.6 percent. BHP Billiton Ltd., the world’s largest mining company, decreased 3.4 percent in London.

The MSCI Asia Pacific Index lost 0.7 percent. Nissan Motor Co., which gets 13 percent of its revenue in Europe, slid 3.2 percent in Tokyo. China’s Shanghai Composite Index decreased 1 percent. Markets in Hong Kong are closed today for a public holiday.

Crude oil for August delivery declined 3.5 percent to $72.95 a barrel in New York, the lowest settlement price since June 8.

Copper futures for September delivery dropped 2.5 percent to $2.877 a pound on the Comex in New York.

Gold futures fell the most since February, with the metal for delivery in August dropping 3.1 percent to $1,206.70 an ounce in New York as signs that Europe’s financial industry may be in better shape than investors estimated curbed the appeal of the precious metal as a haven.