Stocks Drop, Global Bonds Rally on Economy Concerns

Stocks Drop, Global Bonds Rally on Economy Concerns; Yen Gains

By Stephen Kirkland and Nikolaj Gammeltoft

Aug. 11 (Bloomberg) -- Stocks plunged globally, sending the MSCI World Index to its biggest drop since June, and Treasuries led a rally in government bonds on concern that the U.S. economic recovery is in jeopardy. The yen advanced to a 15-year high against the dollar.

The MCSI global index slid 2.8 percent, the biggest since June 29. The Standard & Poor’s 500 Index sank 2.6 percent to 1,091.77 at 11:22 a.m. in New York. The Stoxx Europe 600 Index declined 2 percent. The two-year Treasury yield fell as much as three basis points to a record low 0.4892 percent. Gilts extended gains after the Bank of England cut its growth forecast. The yen strengthened as much as 0.8 percent to 84.73 per dollar, the strongest since July 1995.

The Federal Reserve’s statement yesterday that it would maintain stimulus measures to support a recovery was followed by the announcement that China’s industrial output rose the least in 11 months, adding to signs that the world’s third-biggest economy is slowing. The selloff today halted a monthlong rally in stocks that restored almost $4 trillion to global equity markets between July 5 and yesterday.

“We’re in a worldwide soft patch and investors wonder why the Fed didn’t do more,” said James Swanson, chief investment strategist at Boston-based MFS Investment Management, which oversees about $197 billion. “People are dumping stocks because they’re afraid earnings will decelerate and the economy is losing steam.”

The S&P 500 extended yesterday’s 0.6 percent retreat as a late-day rally in the benchmark gauge failed to erase losses after the Fed’s plan to continue purchasing Treasuries failed to offset concern that the recovery is faltering.

Trade Gap Widens

America’s trade deficit unexpectedly widened in June to the highest level since October 2008 as consumer goods imports rose to a record and exports declined.

The difference between two- and 10-year Treasury yields narrowed as much as to 2.20 percentage points, the smallest since May 2009. The German 10-year bund yield dropped to 2.42 percent, the lowest since at least 1989, when Bloomberg began compiling the data.

Ten-year gilt yields fell 13 basis points to 3.13 percent after the central bank said the U.K.’s economic growth will probably peak at a 3 percent annual pace, slower than the 3.6 percent rate it had forecast in May. The pound depreciated 1 percent to $1.5697.

The yen appreciated against all 16 of its most-traded counterparts, climbing 2.3 percent to 109.94 per euro. The dollar gained versus all its peers except the yen. The South Korean won dropped after the government reported the highest unemployment level since April. The won slid 1.2 percent to 1,182.50 per dollar.

Alcoa Inc., DuPont Co. and Boeing Co. slumped more than 2.7 percent led losses in the Dow Jones Industrial Average as all 30 stocks in the index declined. Amazon.com Inc. fell for the first time in nine days and EBay Inc. slipped 2.3 percent after Alibaba.com Ltd., the Chinese e-commerce operator, said it wants to expand in the U.S.

More than 20 stocks fell for every one that rose in Europe’s Stoxx 600 index. Raw-materials companies led declines, with Rio Tinto Group Plc slipping 3.4 percent. Nobel Biocare Holding AG tumbled 11 percent after second-quarter profit fell. The MSCI Asia Pacific Index slid 1.6 percent, the biggest decline since June 7.

Emerging Markets

The MSCI Emerging Markets Index lost 1.5 percent, and the MSCI China Index fell 1.3 percent. New loans were 532.8 billion yuan ($78.6 billion) in July, China’s central bank said, less than the 600 billion yuan median estimate in a Bloomberg survey of economists. Retail sales grew an annual 17.9 percent, compared with 18.3 percent in the previous month. Industrial output growth slowed to 13.4 percent, the smallest gain since August last year after excluding distortions caused by holidays.

Growth in oil demand will decline in 2011, the International Energy Agency in Paris said, citing “significant” risks that the global recovery will falter.

Crude fell $2.07 to $78.18 on the New York Mercantile Exchange, extending declines after a U.S. government report showed a bigger-than-estimated increase in supplies of gasoline and distillate fuels. Nickel led declines on the London Metal Exchange, falling 1.6 percent to $21,850 a metric ton. Copper futures for September delivery dropped 2.1 percent to $3.2420 a pound on the Comex in New York.