Stocks Slide on Economy Concern; Yen, Dollar, Treasuries Gain

By Daniel Hauck and Lynn Thomasson

Aug. 17 (Bloomberg) -- Stocks tumbled around the world, led by China, while the yen, dollar and Treasuries rose as investors speculated that a rally in riskier assets has outpaced prospects for economic growth. Energy and commodity prices also slid.

The MSCI World Index of 23 developed nations sank 2.8 percent at 4:12 p.m. in New York, the biggest retreat since April. The Standard & Poor’s 500 Index lost 2.4 percent to 979.3 after China’s Shanghai Composite Index slumped 5.8 percent, the most since November. The yen strengthened against all 16 of the most-traded currencies tracked by Bloomberg, while the dollar advanced against every one except the yen. The yield on the benchmark 10-year Treasury note dropped to its lowest level in almost a month.

“The stock-market reaction overseas has woken people up to the fact that it’s not going to be a straight line up,” said Myles Zyblock, chief institutional strategist at RBC Capital Markets in Toronto. “People are starting to question the strength of the recovery.”

Equities tumbled after foreign direct investment in China fell, Yunnan Copper Industry Co. said there were “no clear signs” of a recovery and Japan’s economy grew less than economists estimated, reigniting concern a 55 percent rally in the MSCI World from March 9 through last week was overdone. The tally of failed U.S. banks this year climbed to 77 last week, while the Reuters/University of Michigan index of consumer sentiment in America showed an unexpected decrease.

All 10 industry groups in the S&P 500 retreated today and 28 of 30 stocks in the Dow Jones Industrial Average declined, sending the measure down 186.06 points, or 2 percent, 9,135.34.

VIX Jumps

The benchmark index for U.S. stock options jumped the most since April. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 15 percent to 27.89, the highest level in a month. The index, which measures the cost of using options to insure against declines in the S&P 500, is down from a record 80.86 in November yet above its 20 average over its 19- year history.

Alcoa Inc., Caterpillar Inc. and General Electric Co. lost more than 4 percent to help lead the Dow lower. Lowe’s Cos. slid 10 percent, the biggest decline in the S&P 500, after the second-largest U.S. home-improvement retailer reported quarterly profit that missed analysts’ estimates.

S&P 500 financial shares lost 4.3 percent as a group for the steepest decline among 10 groups, with Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. down at least 4 percent. U.S. banks tightened standards on all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve report showed today.

Commodity Producers Slump

Raw-material producers in the S&P 500 collectively lost 3.7 percent as energy, copper and aluminum prices slumped. Freeport- McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, sank 6.7 percent.

Gains for Treasuries sent the yield on the benchmark 10- year note down eight basis points to 3.49 percent. The cost of protecting corporate bonds from default rose, pushing contracts on the Markit CDX North America Investment-Grade Index, linked to 125 companies in the U.S. and Canada, up 4.5 basis points to a mid-price of 121.5 basis points, according to Phoenix Partners Group. That’s the highest since July 22, according to CMA DataVision.

Financial shares tumbled even as the Federal Reserve extended an emergency program aimed at stimulating credit markets, a move that may cushion the commercial real-estate industry from rising defaults and falling prices.

TALF Extended

The Term Asset-Backed Securities Loan Facility, with a capacity of as much as $1 trillion, will expire June 30 for newly issued commercial mortgage-backed securities, instead of Dec. 31, the Fed and U.S. Treasury said today in a statement in Washington. For other asset-backed securities and CMBS sold before Jan. 1, the plan was extended three months to March 31.

The Dow Jones Stoxx 600 Index of European shares retreated 2 percent, the biggest drop since July 2. A 42 percent rebound since March 9 left the regional measure valued at 40.2 times the profits of its companies, near the most expensive since 2003, data compiled by Bloomberg show.

The world’s biggest pension funds have lost confidence in stocks as the best long-term investment, cutting holdings or leaving them unchanged during the steepest rally since the 1930s. Funds overseeing money for California teachers and public workers, Dutch government retirees and South Korean private- sector employees reduced their target weightings for equities this year, data compiled by Bloomberg show.

Japan’s Economy

The MSCI Asia Pacific Index lost 3.1 percent, the steepest decline since March. Japan’s gross domestic product expanded at an annual 3.7 percent pace in the three months ended June 30, missing the median estimate for a 3.9 percent increase in a Bloomberg News survey. Sony Corp., the maker of the PlayStation 3 game console, retreated 4.1 percent in Tokyo.

The recent rally in equities was spurred by growing speculation that the worst of the economic contraction is over.

Confidence in the world economy surged to a 22-month high in August on signs the first global recession since World War II is approaching an end, a Bloomberg survey of users on six continents showed last week. The U.S. unemployment rate dropped in July for the first time since April 2008, data from the Labor Department showed this month, while the German and French economies unexpectedly grew last quarter, government figures indicated last week.

Economy Watch

The U.S. recession is “ending right now,” Abby Joseph Cohen, New York-based senior investment strategist at Goldman Sachs Group Inc., said in an interview on Bloomberg Television and Radio. The Federal Reserve Bank of New York’s general economic index showed today that manufacturing in the New York region grew in August for the first time in more than a year. The Fed’s index was 12.08, topping the reading of 3 forecast by economists and up from minus-0.55 the prior month.

Profit that missed analysts’ estimates at Ping An Insurance (Group) Co. helped send China’s Shanghai Composite Index down 5.8 percent, the steepest slump since Nov. 18.

Ping An, China’s second-biggest insurance company, fell 3.9 percent after first-half net income dropped 45 percent. Yunnan Copper sank 10 percent after posting a first-half loss.

The MSCI Emerging Markets Index declined 3.9 percent, the steepest drop since March.

The yen advanced 1.8 percent against the Australian dollar as demand for higher-yielding currencies waned. The pound slid 1.2 percent against the U.S. dollar on growing evidence the U.K.’s sputtering economy is halting the currency’s biggest five-month rally in 24 years.

Rally ‘Overextended’

“The rally in risk assets has become overextended as it has run ahead of the improvement in fundamentals,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in an e-mailed report. “The dollar and yen have been boosted by a pickup in safe-haven demand.”

Copper for delivery in December fell 2.3 percent to $2.7855 a pound in New York. Aluminum, nickel and zinc also declined. Crude oil retreated 76 cents to $66.75 a barrel in New York, a two-week low. Gold fell as much as 1.8 percent to $931.30 an ounce.

The tumble in China triggered the first of five bearish indicators for U.S. equities, according to technical analysts at Bank of America Corp. The drop in the Shanghai Composite Index breached a technical level of 3,011 cited by New York-based analysts Mary Ann Bartels and Stephen Suttmeier in a report today.

China’s equity market “is selling off and beginning to break key support levels,” the analysts wrote. In addition, a sentiment gauge suggests investors have become too bullish on the equity market, they said.

“Since China was leadership during both the bear market decline and the recovery, this could very well be the ‘canary in the coal mine,’” the analysts wrote.