Global Markets Fear Italian Crisis Fallout; S&P 500 Down 3.7%

Bikram Pandey
09 Nov, 2011
New York City

U.S. indexes plunged as investors began to digest the global implications of the Italian and the euro zone turmoil. Italian bond yields surged over 7%, the level that brought down four other governments and required bailouts from the European authorities. Gold dropped 2%, copper declined 5%.

[R]4:30 PM New York – U.S. indexes plunged as investors began to digest the global implications of the Italian and the euro zone turmoil. Italian bond yields surged over 7%, the level that brought down four other governments and required bailouts from the European authorities. Gold dropped 2%, copper declined 5%.[/R]

U.S. indexes opened lower after the euro zone stress overwhelmed bonds and equities markets. The decline in market indexes intensified in the late afternoon as investors began to factor global implications of the fast developing Italian crisis.

Italian bond yields rose to 7.35%, the level that forced Portugal, Greece and Spain to seek bailouts from the European authorities. However, the scale and nature of Italian crisis has put most policy makers and international lenders in a dilemma.

Italy needs to raise at least €300 billion in debt every year and that was when the interest rates on the government bonds were half of today. The size of the Italy’s €1.9 trillion in debt is greater than the debts of Portugal, Spain, Ireland and Greece combined. Italy’s debts are still rising and the cost of debt has doubled in less than a year.

The indexes accelerated losses in the final 90 minutes of trading in New York. European Central Bank has so far resisted from adding to Italian bonds in the hopes that more reforms will be implemented in the near future.

But, time may have run out for Italy. The bond yields soared from 6% to 7% in less than fifteen trading days and increased from 5% to 6% in less than forty five trading days before. Italy could well see another sustained rise in interest rate unless the ECB steps in buys bonds.

In addition, bond clearing agency LCH.Clearnet increased their margin requirements for the trading in Italian bonds of 7- and 10-year maturities to 11.65% from 6.65% in the first week in October.

The debt contagion deepened further with the yield on French bond increased to 3% in trading today as speculators increasingly bet that France will lose its AAA rating as early as January.

European markets were on the defensive after investors face a protracted political wrangling in Italy and Greek leaders struggled for the third day to appoint a new government.

In earnings, Ashland reported fourth quarter net loss widened to $263 million. Dean Foods said net in third quarter swung to a loss $1.54 billion. General Motors third quarter net fell to $1.7 billion.

Macy’s third quarter net soared to $139 million. Ralph Lauren said second quarter net rose to $233.5 million. Adobe Systems dropped 10% after it announced a restructuring. Blue Nile plunged 30% on weak margins and lower earning. Weight Watchers declined 8%.

Vestas Wind Systems cut its annual outlook. Daimler AG may sell its EADS stake to German bank.

Stocks in Japan gained after industrial and export sensitive companies led the gainers. Isuzu Motor reported better than expected earnings and ball-bearings makers plunged on the antitrust inquiry from the European Union regulators.

Nomura and Sumitomo Mitsui Financial dropped on the widening Olympus scandal that many commentators suggest that the broker may have played a key role in hiding securities losses over a decade.

Stocks in India were on the defensive after October auto sales declined 24% from a year ago, the second steepest monthly decline since December 2000. The central bank has increased interest rate 13 times in the last two years and rising fuel prices and surging inflation has cut the demand.

Australian stocks edged higher after confidence index rose and better than expected earnings from the retailer Myer and media conglomerate Seven Group Holdings. Corporate bankruptcy filings increased 18% in the third quarter to September to 2,961.

Commodities, Bonds and Currencies

The yield on 10-year U.S. bond closed down to 1.96% and 30-year bond decreased to 3.02%.

The U.S. dollar rose 2% at $1.354 to one euro and closed lower against the Japanese yen to 77.83.

Immediate delivery futures of Texas crude oil decreased $0.79 to $96.01 a barrel and futures of natural gas decreased 8 cent to $3.65 per mbtu and gasoline prices decreased 5.5 cents to 265.08 cents a gallon.

In metals trading, copper decreased 14.15 cents to $3.39 per pound, gold decreased $33.70 to $1,765.50 per ounce and silver decreased $1.25 to $33.89.