European Debt Stress Drags S&P 2% Lower; Euro at $1.40

Bikram Pandey
11 Jul, 2011
New York City

U.S. indexes on Monday dropped as much as 2%. The sentiment weakened after the weak jobs report on Friday, rising inflation in China and the spread of sovereign debt stress in Italy accelerated sell-off from the start. Peabody Energy made one more attempt to acquire Australia based Macarthur Coal.

[R]4:00 PM New York – U.S. indexes on Monday dropped as much as 2%. The sentiment weakened after the weak jobs report on Friday, rising inflation in China and the spread of sovereign debt stress in Italy accelerated sell-off from the start. Peabody Energy made one more attempt to acquire Australia based Macarthur Coal.[/R]

U.S. indexes were caught in a spiral that dragged the European markets down significantly. The U.S. indexes dropped between 1.3% and 2% after European regulators expanded their debt talks to cover Italy, the latest focus of bond market.

The yield on Italian bond rose to 5.67% and spread to German 10-year bonds surged to a record 260 basis points, the widest since the creation of the euro in 1999.

European regulators are increasingly worried that the size of the bailout fund for the euro-zone may have to be expanded significantly, if Italy becomes the target of speculators. The current €700 billion bailout fund may have to be increased beyond €1 trillion. Italy has €350 billion of government debt due in the next five years.

Financial markets took a note of the rising bonds yields and record Italian bond spreads. The Italian benchmark index plunged 4% in heavy trading with banks leading the losses. Italian index has dropped 21% from the peak and lost 11% in the last six sessions.

The weak sentiment first spilled over to peripheral euro-zone nations’ indexes and dragged markets in Paris and Frankfurt lower more than 2%.

In the merger news, Peabody and ArcelorMittal confirmed joint bid for Australia-based Macarthur Coal for $5 billion. Nestle agreed to buy stake in China-based Hsu Fu Chi for $1.72 billion. Precision Castparts agreed to acquire Primus International for $900 million.

Arch Chemicals agreed to be acquired by Lonza Group AG for $1.4 billion. Caterpillar completed acquisition of Bucyrus International of $8.8 billion. Micromet and Amgen enter in a collaboration agreement. Stillwater enters in a deal to acquire Peregrine Metals Ltd for $487.1 million.

In economic news, the OECD leading index fell in May. French industrial production expanded and Greek industrial output rebounded in May. Denmark surplus rose and Estonia''s trade deficit narrowed to €24.4 million. Romania’s inflation eased in June.

The UK indexes traded lower on global economic concerns as Italy gained the focus of bond investors. Manufacturing output in Ireland increased in May and construction activity dropped in June.

British Sky Broadcasting slumped 6.5% after the company''s proposed acquisition by News Corporation faced more regulatory scrutiny after News Corp was forced to shut down The News of World for its news gathering techniques and lack of journalistic ethics.

The Nikkei index declined after rallying for two weeks and the yen strengthened. Industrials and automakers declined after the U.S. reported sharply lower than expected increase in payrolls. Banks fell after debt contagion fears spread in the euro-zone to Italy.

Stocks in Australia in a knee jerk reaction closed lower after Prime Minister Julia Gillard proposed to levy $23 a ton of carbon generated by the largest 500 Australian companies.

The proposal is expected to be implemented by July 2012. Qantas quickly announced the plan to pass on the tax to consumers. Macarthur received joint bid from ArcelorMittal and Peabody.

Asian markets closed generally lower after China reported fastest inflation in three years. The sharp increase in inflation above 6.3% stoked worries that the current tightening measures are not effective and may need more measures to cool down the economy.

Commodities, Bonds and Currencies

The 10-year U.S. bond yield decreased to 2.91% and 30-year U.S. bond traded fell to 4.20%.

The U.S. dollar increased at $1.403 to one euro and fell against the Japanese yen to 80.30 yen.

Immediate delivery futures of Texas crude oil decreased $1.16 to $95.04 a barrel and futures of natural gas increased 0.09 cents to $4.29 per mbtu and gasoline price decreased 2.49 cents to 306.77 cents a gallon.

In metals trading, copper decreased 5.25 cents to $4.35 per pound, gold soared $11.20 to $1,552.80 per ounce and silver decreased $068 to $35.87.