Search

Stocks Drop on U.S. Budget Concerns; Treasuries, Yen Rise

By Will Hadfield and Nikolaj Gammeltoft
December 21, 2012 4:12 PM EST 6 Comments
Traders work on the floor of the New York Stock Exchange.
Photographer: Jin Lee/Bloomberg
Traders work on the floor of the New York Stock Exchange.

Stocks sank around the world, Treasuries gained and the yen strengthened after House Republican leaders scrapped a plan to allow higher taxes on top earners as budget talks stalled. Commodities declined.

The MSCI All-Country World Index dropped 0.8 percent at 4 p.m. in New York and the Standard Poor’s 500 Index slumped 0.9 percent to 1,430.15, with volume 45 percent higher than the 30- day average at this time of day. The Stoxx Europe 600 Index slipped 0.3 percent, falling from a 19-month high. The yield on 10-year Treasuries decreased four basis points to 1.76 percent. The dollar strengthened against 14 of 16 major peers, while the yen gained against all 16. Oil and nickel fell at least 1.3 percent to lead commodities lower.

The S&P 500’s loss was its worst since Nov. 14 and came after House Speaker John Boehner yielded to anti-tax resistance within his party, fueling concern Republicans and Democrats will fail to agree on a budget. Lawmakers won’t vote on budget issues until after Christmas, giving them less than a week to prevent tax increases and spending cuts from taking effect in January. The standoff overshadowed data showing bigger-than-estimated growth in personal income and durable goods orders.

“With such a staunch group in the House, it looks as if the odds of going into 2013 without a deal have increased,” Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which oversees about $130 billion in assets, said by telephone. “I don’t know whether we’re going to reach a deal, when we’re going to reach a deal, if there’s going to be a deal. It’s just a complete wild card at this point.”

Stocks Slide

Boehner called on President Barack Obama and Senate Majority Leader Harry Reid to come up with legislation to stop more than $600 billion of additional taxes and spending cuts from coming into force. The Congressional Budget Office has said that failing to avoid the fiscal cliff would probably lead to a recession in the first half of 2013.

“The president’s main priority is to ensure that taxes don’t go up on 98 percent of Americans and 97 percent of small businesses in just a few short days,” White House spokesman Jay Carney said in a statement. “We are hopeful that we will be able to find a bipartisan solution quickly.”

Gauges of energy, financial, telephone and consumer companies lost at least 1 percent to lead declines in all 10 of the main industries in the S&P 500. The index pared its weekly gain to about 1 percent.

Bank of America Corp., Exxon Mobil Corp. and Walt Disney Co. lost at least 1.9 percent for the biggest declines in the Dow Jones Industrial Average, which slumped 120.88 points to 13,190.84. Micron Technology Inc. slid 6.9 percent after posting a wider first-quarter loss.

Research In Motion Ltd. tumbled 23 percent, the most in four years, after the BlackBerry maker said it will overhaul the service fees it charges subscribers. Nike Inc. advanced 6.2 percent after the world’s largest sporting-goods company reported profit that exceeded analysts’ projections.

Risk Perceptions

Risk perceptions for U.S. equities have risen to the highest level in four years compared with European stocks as the American economy faces a potential recession should lawmakers fail to reach a budget agreement.

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 option prices, rose to 17.67 yesterday. That’s the highest level since December 2008 versus Europe’s VStoxx Index, which closed at 15.76 yesterday. U.S. equities are lagging behind Europe, with the S&P 500 up 13 percent from its June 1 low through yesterday, while the Stoxx Europe 600 Index has gained 20 percent since then.

Economic Data

U.S. consumer confidence fell in December to a five-month low as Americans grew more concerned about the possibility of higher taxes next year. The Thomson Reuters/University of Michigan consumer sentiment index decreased to 72.9, the weakest since July, from 82.7 in November.

Another report showed spending by U.S. consumers climbed in November as Americans bought gifts for the holidays and made up for shopping lost to superstorm Sandy. Purchases increased 0.4 percent last month after a 0.1 percent drop in October that was smaller than previously estimated, Commerce Department figures showed. Incomes rebounded, increasing 0.6 percent, after being depressed in October by lost wages due to Sandy.

The S&P GSCI gauge of commodities has slipped 1 percent this year, heading for its first annual decline since 2008.

West Texas Intermediate crude for February delivery fell 1.6 percent to $88.66 a barrel on the New York Mercantile Exchange. Goldman Sachs Group Inc. commodity analysts yesterday stepped away from a previous forecast that the spread between the two grades would narrow to $4 a barrel within three months. They now predict $14. The gap today is more than $20 currently.

European Markets

The Stoxx Europe 600 Index slid from its highest level since May 2011. ArcelorMittal (MT), the world’s biggest steelmaker, dropped 2.5 percent after saying it will write down the goodwill for its European businesses by about $4.3 billion.

The equity benchmark has still soared 15 percent this year, its biggest annual rally since 2009. European stock trading may be more volatile than usual as futures and options contracts expire in a process known as quadruple witching.

Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency against those of six major U.S. trading partners, snapped a five-day decline to rise 0.4 percent to 79.59. It reached 79.01 on Dec. 19, the lowest level since Oct. 18.

Currency Watch

The yen has tumbled 12 percent this year, the worst performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has weakened 2.9 percent and the euro has dropped 1.1 percent.

Emerging-market stocks fell for a second day as the deteriorating U.S. budget talks threatened the outlook for exporters’ earnings. The MSCI Emerging Market Index slid 1 percent, its biggest drop in six weeks. China’s stocks retreated from a four-month high on concern that the rally from the beginning of this month was excessive. The Shanghai Composite Index fell 0.7 percent and India’s Sensex slid 1.1 percent.

To contact the reporters on this story: Will Hadfield in London at whadfield@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

Comments
More related content »