U.S. stocks fell, following the biggest gain since 2009 for benchmark indexes, amid concern that Europe will fail to contain its sovereign-debt crisis and that the U.S. economic recovery is faltering.
Citigroup Inc. (C) dropped 2.8 percent, pacing losses in financial shares, as the cost of insuring French debt rose to a record today. Banks, insurers, brokerages and investment firms in the Standard & Poor’s 500 Index led gains yesterday after the Federal Reserve said it’s prepared to use a range of tools to bolster the economy. Costco Wholesale Corp. (COST) declined 2.7 percent after Jefferies Group Inc. downgraded the warehouse-club chain.
The S&P 500 slipped 2.2 percent to 1,147.11 at 9:33 a.m. in New York. The benchmark gauge for American equities jumped 4.7 percent yesterday, its largest rally since March 2009, as it rebounded from a 17 plunge since July 22. The Dow Jones Industrial Average lost 260.24 points, or 2.3 percent, to 10,979.53 today.
“We’ve got to be very careful before assuming that this rally is at the beginning of a full-blown recovery,” said Tom Elliott, a global strategist at JPMorgan Asset Management, which has about $1.3 trillion in client funds. “What we are really going to be looking for is a once-and-for-all solution to the euro-zone debt crisis and some form of political consensus on Capitol Hill that the deficit is not going to be used as a political gambit as we run up to the presidential election,” he said in a Bloomberg Television interview.
Valuation Level
The S&P 500 fell 14 percent from this year’s high on April 29 through yesterday and about $2.6 trillion in U.S. market value has been erased amid concern about Europe’s debt crisis and a political battle over the U.S. debt ceiling that prompted S&P to cut the country’s credit rating. The index was trading at 12.8 times reported earnings, near its lowest valuation since March 2009, according to data compiled by Bloomberg.
France’s borrowing costs are rising as Europe’s debt crisis makes investors wary of lending to any nation other than Germany. Investors currently demand about 90 basis points of extra yield to buy 10-year French debt rather than German bunds, even though both carry AAA grades from the major rating companies. That spread is almost triple the 2010 average of 33, and compares with 17 in the second half of the previous decade. The cost of insuring French debt rose to a record today.
The ECB bought Italian and Spanish bonds for a third day today as it tries to halt a market rout, pushing Spain’s 10-year yield below 5 percent for the first time since December. The central bank’s previous round of bond purchases, though, failed to protect Ireland and Portugal from following Greece in needing financial aid as their funding costs surged.
AAA Securities
French bonds are the most costly AAA government securities to insure as investors raise bets that top-rated euro-region nations may be next in the firing line after the U.S. was downgraded by one notch to AA+ by S&P on Aug. 5. Credit-default swaps on France trade at 163 basis points, double the rate to protect German securities.
“European banks are putting pressure on stocks,” Peter Jankovskis, who helps manage about $2.6 billion at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. “The focus still remains over there, even if it had shifted a bit to the debt-ceiling concern in the U.S. It’s not a concern that the banks are going out of business. It’s just a concern that the cost of operation is going up. We’ve been watching financial stocks getting killed over here.”
The benchmark Stoxx Europe 600 Index lost 1.1 percent to 229.55, having earlier climbed 2.2 percent. The measure entered a bear market on Aug. 8 and has still declined 21 percent from this year’s high on Feb. 17. A gauge of European banks tumbled 3.8 percent.
Financial shares in the S&P 500 dropped 2.7 percent. Citigroup fell 2.8 percent to $30.92. Bank of America Corp. (BAC) retreated 5 percent to $7.22.
Costco dropped 2.7 percent to $72.64 after Jefferies cut is recommendation for the warehouse club-chain to “hold” from “buy.”
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