Global stocks dropped, European shares suffered the biggest two-day slump since 2008 and oil sank below $80 a barrel on concern the U.S. recovery is faltering and Europe’s debt crisis will worsen. The Swiss franc gained, while gold reached a record high.
The MSCI All-Country World Index declined 1.4 percent at 7:21 a.m. in New York. The Stoxx Europe 600 Index lost 2.5 percent, paring declines of as much as 3.6 percent. Standard & Poor’s 500 Index futures slipped 1.7 percent. Oil dropped 3 percent and gold topped $1,860 an ounce for the first time. The franc strengthened against all of its 16 major peers. Thirty- year Treasury notes rose for a fourth day.
More than $6 trillion has been erased from the value of global equities this month on signs the U.S. recovery is stumbling, while the cost of insuring European sovereign debt is back to levels that triggered the region’s central bank to buy Italian and Spanish bonds on Aug. 8. JPMorgan Chase & Co. and Citigroup Inc. cut forecasts for the world’s largest economy, while Morgan Stanley lowered targets for stock indexes in Indonesia and Singapore.
“Fear is breeding fear now,” said Nader Naeimi, a Sydney- based strategist for AMP Capital Investors Ltd., which manages almost $100 billion. “There’s a total lack of confidence in policy makers’ ability to defuse the situation.”
Volatility
Volatility climbed in Europe and Asia. The VStoxx Index, which measures the cost of Euro Stoxx 50 Index options, surged 15 percent to 54.04, the highest since January 2009. Hong Kong’s HIS Volatility Index jumped 31 percent, the most in almost two weeks. In the U.S., the VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 35 percent to 42.67 yesterday, the third-highest close of 2011.
All but 54 of the Stoxx 600’s members fell as the gauge headed for the lowest close in two years. Daimler AG and Bayerische Motoren Werke AG led a decline in automakers, sliding more than 3 percent. Technology shares were the only industry group among 19 in the Stoxx 600 to gain, as Autonomy Corp. surged 75 percent after the U.K. software company agreed to be bought by Hewlett-Packard Co. for $10.3 billion.
The decline in U.S. futures signaled the S&P 500 will extend yesterday’s 4.5 percent slump. The S&P 500 has tumbled 16 percent from its April high, about the same as the retreat between April 23 and July 2, 2010, previously the biggest contraction of the bull market that began in March 2009.
Growth Forecasts Slashed
Citigroup cut its U.S. gross domestic product growth estimate to 1.6 percent in 2011 from 1.7 percent, and lowered its forecast for 2012 to 2.1 percent from 2.7 percent. JPMorgan said GDP will grow 1 percent in the fourth quarter rather than the 2.5 percent previously forecast and 0.5 percent in the first quarter of 2012 instead of 1.5 percent.
A gauge of banks in the Stoxx 600 slid 2.7 percent, on course for the lowest close since April 2009. Lloyds Banking Group Plc, Britain’s biggest mortgage lender, declined 5.6 percent, Swedbank AB retreated 5.3 percent and Deutsche Bank AG lost 5 percent.
The cost of protecting European bank bonds from default jumped a record, with the Markit iTraxx Financial Index of default swaps linked to senior debt of 25 banks and insurers climbing 12 basis points to 245 basis points, an all-time high based on closing prices, according to JPMorgan Chase & Co. The Markit iTraxx SovX Western Europe Index of credit-default swaps linked to 15 governments climbed 3.5 basis points to 294.
Two-year Greek yields surpassed 37 percent for the first time in almost a month, and 10-year yields increased 40 basis points to 16.40 percent. The extra yield investors demand for holding 10-year Portuguese debt instead of German bunds rose to 8.44 percentage points, a two-week high.
Franc, Yen
The franc appreciated 0.6 percent against dollar and rose 0.8 percent versus the euro, heading for the biggest weekly gain against the single currency since the week ended July 1. The yen rose against the dollar and the euro even after Finance Minister Yoshihiko Noda signaled he’s ready to curb its gains. The yen rose 0.2 percent against the dollar and 0.4 percent versus the euro.
The 30-year Treasury yield fell three basis points 3.39 percent. The extra yield investors demand to hold U.S. 30-year bonds instead of two-year notes was at 319 basis points, matching the lowest since September last year, as concern on economic growth deepened. The narrowing spread signals investor preference for the longer-maturity paper, which is more sensitive to the outlook for inflation.
Money Markets
The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, was at 22 basis points, the highest level since August last year. The rate banks charge to lend to each other in francs for three months dropped to a record low 0.00833 percent today from 0.01333 yesterday, the British Bankers’ Association said. Credit Suisse AG, the Zurich-based bank, submitted a negative three-month rate for a second day, at negative 0.15 percent compared with negative 0.10 percent yesterday.
The MSCI Emerging Markets Index lost 2.9 percent, bound for the lowest close since August 2010. South Korea’s Kospi Index (KOSPI) sank 6.2 percent, the steepest drop since November 2008, while Taiwan’s Taiex index plunged 3.6 percent. Benchmark indexes in Russia, India, Turkey, Hungary and the Czech Republic.
The Turkish lira fell for a second day, hitting the lowest level since March 2009, on speculation that a global slowdown will prompt the central bank to cut rates next week.
Oil dropped as much as 3.9 percent to $79.17, before trading at $79.93. The S&P GSCI index of 24 commodities declined 0.7 percent and is down 0.8 percent this year. Gold for immediate delivery jumped to $1,867.58 an ounce after trading at the record $1,887.63 earlier today.
By Stephen Kirkland – Bloomberg Aug 19, 2011 4:25