Stocks, Commodities Slide, Treasuries Gain on Obama Bank Reform Share Business
By Michael P. Regan
Jan. 21 (Bloomberg) -- Stocks plunged, erasing the Dow Jones Industrial Average’s gain for the year, and Treasuries rose as President Barack Obama proposed limiting risk-taking at banks and concern grew that China will do more to cool its economy. Oil slid as gasoline supplies grew more than forecast.
The Standard & Poor’s 500 Index sank 1.9 percent at 4:13 p.m. in New York, its biggest loss since Oct. 30, as financial shares slid 3 percent as a group. The MSCI Emerging Markets Index fell 1.9 percent as the benchmark Bovespa index in Brazil, whose largest trading partner is China, tumbled 2.8 percent. Ten-year Treasury notes gained for second day, sending their yield down five basis points to 3.60 percent.
Obama proposed that banks be prohibited from running proprietary trading operations or investing in hedge funds and private equity funds as a way to limit the risk of another financial crisis. The plan comes as banks around the world are recovering from $1.7 trillion in losses and writedowns since the start of 2007.
“This is the sell-off a lot of investors have been waiting for since September,” said Alan Gayle, a money manager at RidgeWorth Investments in Richmond, Virginia, which oversees $60 billion. “The bulls are being tested.”
The concern over lending in China and banking reforms in the U.S. overshadowed better-than-estimated earnings at companies from Starbucks Corp. to Xerox Corp. and EBay Inc. which sent U.S. shares higher at the start of trading.
The S&P 500 lost 2.9 percent over the past two days and the Dow tumbled 3.1 percent, the biggest drop for the S&P 500 since the beginning of October and the worst for the Dow since June. An unexpected increase in initial jobless claims also weighed on the U.S. stock market today.
Bank of America Corp. and JPMorgan Chase & Co. lost more than 6 percent today to lead the S&P 500 Financials Index to a 3.1 percent slide, the biggest in almost three months.
“Financials are selling off and dragging down the market,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages about $2.5 billion in San Antonio. “There’s concern about an overhaul of financial services companies, with increased regulation, hurting the bottom-line of banks.”
More than 60 companies in the S&P 500 are reporting fourth- quarter results this week and analysts surveyed by Bloomberg forecast total earnings grew 67 percent, with estimates for a 30 percent increase in the first quarter of 2010. The benchmark index’s valuation climbed last week to 25 times its companies’ reported operating profits, the highest level since 2002, following a 70 percent jump since March.
The dollar rose against 13 of 16 major currencies, led by a 1.5 percent advance versus the New Zealand dollar and a 1.4 percent rally versus the Mexican peso. The Japanese yen gained against all 16, rising more than 2.2 percent against the currencies of New Zealand and Mexico as Obama’s proposal triggered a flight from risky, higher-yielding assets.
The Reuters/Jefferies CRB Index of 19 commodities slid 0.7 percent as gold futures sank to a three-week low of $1,088 an ounce and aluminum and copper lost at least 1.2 percent.
Treasuries gained on demand for the relative safety of U.S. government debt. Ten-year notes erased earlier losses as the Federal Reserve Bank of Philadelphia’s general economic index fell to 15.2 in January, lower than anticipated, and extended gains after Obama detailed his banking reform plan. The U.S. will sell a record-tying $118 billion in notes next week.
Rate, Default Swaps
Two-year interest-rate swap spreads grew to the widest in two weeks. The difference between two-year interest-rate swaps and similar-maturity Treasuries rose as much as 1.7 basis points to touch 29.4 basis points, the widest since Jan. 7, as the drop in government yields outpaced the decline in the rate to convert fixed payments to floating.
Credit-default swaps tied to Goldman Sachs Group Inc. and Morgan Stanley rose following Obama’s proposal.
Swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, rose 3 basis points to a mid-price of 88 basis points as of 12:16 p.m. in New York, according to broker Phoenix Partners Group. An increase in the index signals a decline in investor confidence.
Emerging market equities slid after China’s economy grew 10.7 percent in the fourth quarter, the fastest pace since 2007, the statistics bureau in Beijing reported. The growth added to speculation the central bank will curb record loan growth to prevent the economy from overheating.
“The tightening in China is the biggest catalyst today because we’re all counting on China to pull global growth,” said Ralph Shive, the South Bend, Indiana-based manager of the $1.5 billion Wasatch-1st Source Equity Income Fund. “The jobless claims confirm employment growth is going to be difficult for some time. We need to start seeing some hard data that the recovery is starting.”
Crude oil for March delivery fell 2.1 percent to $76.11 a barrel on the New York Mercantile Exchange and touched $75.66, the lowest price since Dec. 23. Gasoline inventories rose 3.95 million barrels to 227.4 million in the week ended Jan. 15, the Energy Department said in a weekly report. Stockpiles were forecast to climb by 1.75 million barrels, according to the median of 18 analyst estimates in a Bloomberg News survey.
Exxon Mobil Corp. and Chevron Corp., the two largest U.S. oil companies, lost at least 2 percent.
European Shares Drop
European shares followed U.S. equities lower, with the Dow Jones Stoxx 600 Index erasing a 0.6 percent advance and slumping 1.4 percent to its lowest level of the year.
Greek bonds recovered after the yield premium investors demand to hold the nation’s 10-year debt instead of German bunds, Europe’s benchmark government securities, touched 301 basis points, the highest since the euro’s introduction in 1999. The yield on the two-year Greek bond slipped three basis points to less than 4.39 percent. The bonds had slumped for seven straight days on concern the nation will be unable to trim its budget deficit, which is the highest in the European Union.
Credit-default swaps on Greek government debt fell 11 basis points to 339, according to CMA DataVision prices, after climbing to a record 353.5 earlier. The contracts traded at 174 at the beginning of December. Greece’s benchmark stock index dropped 0.8 percent, bringing its decline since Dec. 1 to 17 percent. It slid as much as 3.7 percent earlier.