U.S. stocks slumped, following a two-day advance in the Standard & Poor’s 500 Index, as a surge in Italian bond yields to euro-era records bolstered concern that Europe’s sovereign debt crisis is worsening.
Bank of America Corp. (BAC) and Morgan Stanley tumbled at least 2.9 percent, following losses in European lenders, after LCH Clearnet SA raised the extra charge it levies on clients for trading Italian government bonds and index-linked securities.General Motors Co. (GM) slumped 8 percent after abandoning its target for European results. Adobe Systems Inc. (ADBE) sank 11 percent on plans to cut jobs as it lessens its focus on older products.
The S&P 500 sank 2.3 percent to 1,246.34 as of 11:02 a.m. New York time, after rising 1.8 percent over the previous two days. The Dow Jones Industrial Average lost 254.22 points, or 2.1 percent, to 11,915.96. The Stoxx Europe 600 Index decreased 2 percent, erasing an earlier advance, as the 10-year Italian note yield topped 7 percent for the first time in the euro era.
“The Greek flu is hitting Italy,” James McDonald, chief investment strategist at Northern Trust Corp. in Chicago, which manages $643 billion, said in a telephone interview. “The pressures have led to Berlusconi’s resignation, and now the market says — this is fine and dandy, but who’s going to be the new leadership? Until they know the new leadership’s willingness to implement reforms, they are going to require higher compensation. The risk is that this feeds on itself.”
The deposit factor for Italian bonds due in seven-to-10 years will rise to 11.65 percent, the French unit of LCH Clearnet said. That compares with a charge of 6.65 percent announced on Oct. 7. Clearing houses guarantee that investors’trades are completed by standing in the middle of two counterparties, and raise margin requirements to protect themselves against losses should one side of the trade fail.
German Finance Minister Wolfgang Schaeuble told lawmakers that Italy should request aid from the European Financial Stability Facility if it needs it, two people present at the meeting in Berlin today said. Schaeuble said that he is not worried by Italy’s bond spreads right now because they are similar to spreads in the days before the introduction of the euro, the people said on condition of anonymity because the committee meeting was held in private.
Stocks rose yesterday as Prime Minister Silvio Berlusconi’s offer to resign boosted optimism Italy would appoint a new leader who can tame the debt crisis. Greek Prime Minister George Papandreou’s talks on forming an interim government dragged into a third day as a near-agreement with the biggest opposition party stalled on European demands for written commitments.
“It’s just like a scary movie as it never ends,” Keith Wirtz, who oversees $16.7 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a telephone interview. “The overarching problem is that most of the economies in Europe can’t sustain the size of their governments. We’re going to have this headache for a long time to come.”
All 10 groups in the S&P 500 fell as gauges of financial, commodity and industrial companies slumped at least 2.4 percent. The KBW Bank Index sank 3.4 percent as all 24 stocks retreated. Bank of America lost 2.9 percent to $6.34. Morgan Stanley retreated 5.9 percent to $16.30.
General Motors slumped 8 percent to $23.03. The automaker, which hasn’t turned an annual profit in Europe in more than a decade, fell after rescinding its target for break-even results in the region. Europe operations lost $292 million before interest and taxes in the quarter.
GM said it no longer expects to break even on an EBIT basis before restructuring costs in Europe, citing “deteriorating economic conditions.”
Adobe slumped 11 percent to $27.18. The reduction of 750 jobs, mostly in North America and Europe, will cost $87 million to $94 million before taxes, the company said. After the costs, net income will be 30 cents to 38 cents a share, compared with a previous forecast of 41 cents to 50 cents.
Concern that Europe’s debt crisis may thwart a global economic recovery sent the Morgan Stanley (MS) Cyclical Index down 3.1 percent. The Dow Jones Transportation Average of 20 stocks slumped 2.7 percent. FedEx Corp. (FDX), operator of the world’s biggest cargo airline, slipped 3.4 percent to $80.23. Apple Inc. (AAPL), the biggest technology company, lost 1.8 percent to $398.79.
Energy and raw material producers dropped as the dollar rose, reducing the appeal of commodities. Alcoa Inc. (AA), the largest U.S. aluminum producer, slid 3.7 percent to $10.39.Chevron Corp. (CVX) fell 3.1 percent to $105.52.
Three stocks in the S&P 500 rose. Best Buy Co., the world’s largest consumer-electronics, added 3.3 percent to $27.73, extending yesterday’s gain.
Yahoo! Inc. swung between gains and losses, rising 0.3 percent to $16.02. Alibaba Group Holding Ltd. and Softbank Corp. (9984)are talking with private-equity funds about making a bid for all of the company without the company’s blessing, people with knowledge of the matter said. Representatives of Sunnyvale, California-based Yahoo, China-based Alibaba and Tokyo-based Softbank declined to comment.
The S&P 500 may halt its biggest gain in 20 years, according to two indicators studied by technical analysts at UBS AG. October’s 11 percent rally, which was the biggest monthly advance since 1991, failed to leave the S&P 500 above its 200-day average, limiting the potential for a rally, the Zurich-based analysts wrote in a report yesterday.
The team also said their model for moving average convergence-divergence, or MACD, is heading into “bear mode.”
“We see the risk of more near-term weakness into next week,” Marc Muller and Michael Riesner wrote in the report.“Given the high volatility, we would see a pullback into next week still as a trading opportunity for aggressive traders, whereas, on the upside, we wouldn’t chase the market.”