Stocks Fall, Dollar Advances

Stocks Fall, Dollar Advances as Portugal's Default Risk Rises

By Stephen Kirkland

Traders work at the Frankfurt Stock Exchange in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

Stocks dropped, dragging a gauge of developing markets to its biggest loss since November, while the dollar strengthened as accelerating global inflation drives up borrowing costs. Portugal led an increase in the cost of insuring European government debt against default.

The MSCI Emerging Markets Index sank 2 percent at 10:03 a.m. in New York and the Standard & Poor’s 500 Index lost 0.6 percent as Cisco Systems Inc. and PepsiCo Inc. fell on lower- than-estimated profit forecasts. The Dollar Index added 0.8 percent. Credit-default swaps on Portugal rose 19 basis points as the country’s five-year bond yield rose 8 basis points. Rubber and cotton jumped to records.

U.S. 10-year and 30-year Treasury yields climbed to the highest levels since April this week, triggering concern that the stock-market rally is in jeopardy as bond returns become more attractive to investors and spur increases in consumer and corporate lending rates. Freddie Mac said the 30-year fixed mortgage rate rose to 5.05 percent last week, the highest since April. China lifted borrowing costs this week for the third time in four months and Korea is forecast to raise rates tomorrow.

“We’ve reached the point in which monetary policy is very relevant for asset-market performance,” said Michael Shaoul, whose $423.2 million Marketfield Fund Ltd. beat 86 percent of rivals in 2010. “We’re in a very strong trend of improving data in the U.S., where I see favorable monetary policy for at least 12 months. That’s not the case of emerging markets, where I believe you should be scaling back in countries which have clear inflationary pressures. It won’t be a problem for the global economy, but they will go through a period of adjustment.”

Yield Watch

Yields on 30-year U.S. Treasuries, which yesterday rose to the highest in 10 months, slipped two basis points to 4.75 percent before today’s auction, which completes three sales this week totaling $72 billion. Ten-year yields, which slipped from the highest since April yesterday, were up two basis points at 3.69 percent today.

The S&P 500 slid for a second day after closing at its highest level since June 2008 on Feb. 8. Cisco tumbled 11 percent as the largest provider of networking equipment’s gross margin missed analysts’ projections. PepsiCo lost 1.1 percent after saying increases in commodity prices will be a “major headwind.” Activision Blizzard Inc., the largest video-game maker, plunged 7.2 percent as its earnings forecast fell short of estimates.

Jobless Claims Drop

Inflation concerns and Cisco’s earnings report overshadowed a drop in initial jobless claims to the lowest level since July 2008. Americans filing first-time claims for unemployment insurance fell to 383,000, compared with the mediate estimate of 410,000 in a Bloomberg survey of 51 economists.

About five stocks declined for each that advanced in the Europe’s Stoxx 600. Air France-KLM Group plunged 7.8 percent after posting an unexpected loss. Credit Suisse Group AG, Switzerland’s second-largest bank, slid 6.3 after cutting its profitability target. Alcatel-Lucent SA jumped 16 percent as France’s largest telecommunications equipment maker reported profit that beat analysts’ estimates.

Credit-default swaps on Portuguese debt jumped to 449 basis points, helping push the Markit iTraxx SovX Western Europe Index of swaps on 15 governments up 1.5 basis points. Portuguese bonds pared earlier declines, with the yield on the five-year note at 6.49 percent, down from 6.93 percent earlier.

ECB Buys Debt

The European Central Bank bought Portuguese government bonds, according to three people with knowledge of the transactions. The central bank bought Portuguese debt maturing in five years, two of the people said, declining to be identified because the deals are confidential. An ECB spokesman in Frankfurt declined to comment.

The yield on Ireland’s 10-year bonds rose nine basis points to 9.09 percent, increasing for the sixth day. Default swaps on Ireland were five basis points higher, and those for Spain rose 4 basis points. Contracts on Greece increased 16.5 basis points.

The dollar appreciated against all of its 16 most-traded counterparts, strengthening 1 percent versus the euro. Sterling rose 0.5 percent against the yen and appreciated 0.6 percent per euro after the Bank of England kept its main rate at 0.5 percent today, matching the forecast of all 62 economists surveyed by Bloomberg.

The Australian dollar depreciated 1 percent versus the U.S. currency after a report showed full-time employment dropped in January. The krone fell 0.6 percent against the euro after data showed Norwegian inflation slowed more than analysts estimated in January.

Emerging Markets Slump

The MSCI Emerging Markets Index fell for a sixth day, the longest streak in three months. Benchmark gauges in Russia, South Korea, Indonesia, Taiwan and the Philippines fell at least 1.7 percent.

The gauge of 21 developing countries has lost 5.3 percent so far this year as central banks from China to Indonesia and India raised interest rates to tame consumer-price gains.

Rubber futures rose 0.4 percent to a record 516 yen a kilogram in Tokyo trading. Cotton for March delivery increased as much as 7 percent to $1.8758 a pound on ICE Futures U.S. in New York. Wheat for March delivery fell 0.8 percent to $8.7925 a bushel in Chicago trading, declining for the first time in four days. Crude oil for March delivery rose 0.6 percent to $87.22 a barrel in New York trading.