US stocks sank the most in a month, oil slid and gold gained after Standard & Poor’s cut the American credit outlook to negative and concern about Europe’s debt crisis worsened. Greek two-year bond yields surged to 20 per cent for the first time since at least 1998.
The S&P 500 tumbled 1.5 per cent to 1,299.47 at 11:51 am in New York and the Stoxx Europe 600 Index slid 1.7 per cent. Ten-year Treasury yields were little changed at 3.41 per cent, erasing an earlier gain. The euro lost 1.5 per cent to $1.4210 against the dollar, while Portuguese debt-insurance costs climbed to a record. The S&P GSCI index of 24 commodities slid 1.4 per cent, led by declines in oil and cocoa.
S&P assigned a one-in-three chance it will lower the US rating in the next two years, saying the credit crisis and recession that began in 2008 worsened a deterioration in public finances. Budget differences among Democrats and Republicans remain wide and it may take until after the 2012 elections to get a proposal that addresses the concern, S&P said.
“This is another indication of the need for the US to better control its fiscal destiny, both for its sake and that of the global economy,” said Mohamed El-Erian, chief executive officer at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest manager of bond funds. “Absent credible medium-term fiscal reform, every segment of U.S. society would be faced with higher borrowing costs, a weaker dollar and a less bright outlook for employment, investment and growth.”
Broad Decline
Commodity, industrial and technology companies had the biggest declines among 10 groups in the S&P 500, all of which dropped. Caterpillar Inc, Bank of America Corp and Alcoa Inc lost at least 3.6 per cent to lead declines in all 30 stocks in the Dow Jones Industrial Average. Johnson & Johnson had the smallest decline after Synthes Inc said it’s in talks to possibly be taken over by J&J, the world’s second-biggest seller of medical products.
Thirty-year Treasury yields climbed three basis points to 4.50 per cent. Two-year yields slipped five basis points to 0.65 per cent. The dollar slid 0.8 per cent to ¥82.45, the lowest level of the month, while still strengthening against 14 of 16 other major peers.
Default Swaps Rise
The cost to protect US corporate bonds from default rose to the highest level this month. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 2.3 basis point to a mid-price of 96.27 basis points, according to index administrator Markit Group Ltd.
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S&P cut its long-term outlook to negative from stable, while affirming its ‘AAA’ long-term and ‘A-1+’ short-term ratings.
S&P said in the statement that it believes there is a “material risk” that US officials may not reach an agreement on how to address budgetary challenges by 2013. Under President Barack Obama’s fiscal year 2012 budget, released in February, the total debt subject to the ceiling would be $20.8 trillion in 2016. The plan House Republicans approved April 15, written by Budget Committee Chairman Paul Ryan, would need a debt ceiling of at least $19.5 trillion, according to data compiled by Bloomberg Government.
“It’s truly a shot across the bow and a message to Washington, which has been clowning around on this and playing politics when they should toss ideology aside and focus on achievement,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC.
“It’s a big deal. They’ve put us on notice.”
‘Difficult Fiscal Challenges’
Treasury Assistant Secretary Mary Miller said today that S&P’s outlook on the U.S. credit rating “underestimates” the nation’s leadership.
“We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation,” Miller said in a statement.
About 18 stocks declined for every one that gained in the Stoxx Europe 600. Commerzbank AG, Spain’s biggest lender, and France’s Societe Generale SA fell at least 3.5 percent. Smith & Nephew Plc, which had been identified as a bid target for J&J by analysts at Sanford C. Bernstein & Co., Morgan Stanley and Investec Securities, declined 2.9 percent.
The euro depreciated against 13 of its 16 major counterparts, losing 2.5 percent versus the yen. Portugal’s 10- year yield climbed to a record 584 basis points above benchmark German bunds while the Greek spread reached 1,132 basis points, the most since Bloomberg began collecting the data in 1998.
Greek CDS
Credit-default swaps insuring Greek bonds jumped 66 basis points to 1,221, signaling a 64.5 percent chance of a default within five years, while those for Portugal climbed 18.5 basis points to 616.5, according to CMA. The Markit iTraxx SovX Western Europe Index of default swaps on 15 governments increased eight basis points to 186, the highest in a month, CMA prices showed.
Greece isn’t discussing restructuring its debt, Finance Minister George Papaconstantinou said April 16 in Washington. European Central Bank Governing Council members signaled over the weekend they will keep tightening monetary policy this year to curb inflation.
“The European story has a lot of risks to it as Germany is very strong but peripheral Europe is clearly quite weak, so the last thing they need is higher interest rates,” Adrian Mowat, JPMorgan Chase & Co.’s Hong Kong-based chief Asia and emerging- markets strategist, said in a Bloomberg Television interview.
The yield on Germany’s 10-year bund declined 14 basis points to 3.24 percent. The gilt yield slipped five basis points to 3.55 percent. The pound fell 0.7 percent versus the dollar after Ernst & Young LLP’s Item Club cut its economic outlook for the U.K.
To contact the reporters on this story: Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net
Cordell Eddings in at ceddings@bloomberg.net
To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net