BackGlobal stocks sell off, treasuries rally on Greece; euro rises
Standard & Poor's 500 slides 2.1% erasing its gain for the year; Stoxx Europe 600 Index falls 2.7%; MSCI Emerging Markets Index falls 2%
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New York: US stocks fell the most since April, wiping out a gain for the year, and European shares capped their worst day this year on concern Greece will exit the euro, with uncertain consequences for the region. treasuries advanced with the yen and gold as investors sought haven assets.
The S&P 500 Index sank 2.1% to 2,057.71 at 4pm in New York, falling toward its average price for the past 200 days. The Dow lost 348.66 points, or 1.9%, to 17,598.02 and erased its gain for the year. The Nasdaq Composite Index fell 2.4%, the most since April 2014. The Chicago Board Options Exchange Volatility Index surged 37%, poised for its biggest increase since April 2013.
The Stoxx Europe 600 Index fell 2.7%, the most since 15 October, as Germany’s Dax Index had its worst day since November 2011. Greece’s ASE Index was ordered closed for at least a week. The yield on 10-year treasury notes tumbled 14 basis points to 2.33%. The euro dropped 1% to 136.95 yen. It gained 0.4% to $1.1211.
Greece shut lenders and imposed capital controls, a measure that will deepen the country’s recession and risk driving it toward an exit from the euro. European leaders raised pressure on the country to re-engage, saying it’s up to the government to step back from the brink and stay in the euro. S&P lowered Greece’s credit rating one level and said the probability of the country leaving the euro is now 50%.
“This is going to get quite messy between now and the weekend," Kevin Caron, a market strategist and portfolio manager who helps oversee $170 billion at Stifel Nicolaus & Co. in Florham Park, New Jersey. “There was an expectation that something would break positively at the last minute, but it appears it’s going to be a little messier than that. The rating agency downgrade is certainly part of it."
Euro exit
Prime Minister Alexis Tsipras unexpectedly called a July 5 referendum on the austerity demanded by creditors as the European Commission offered Greek voters a 10-point plan for bailout requirements. The current bailout expires Tuesday as a $1.7 billion payment is due to the International Monetary Fund.
The S&P 500’s decline Monday left it flat for the last three months, threatening to halt a streak of nine straight quarterly gains, the longest since 1998. The index is higher by 0.4% in 2015. It’s fallen four straight days for the first time since March.
The decline is jolting equities out of a two-month torpor during this holiday-shortened week. The S&P 500 lost only 0.4% last week, after climbing to within a point of its all- time high, the ninth straight period without a move of at least 1%.
Stock volatility surged with the Chicago Board Options Exchange Volatility Index jumping 28%, its biggest increase since October. A gauge of European share swings climbed 15% to an eight-month high.
Contagion risk
“We finally reached the breaking point," Michael James, a managing director of equity trading at Wedbush Securities Inc. in Los Angeles, said by phone. “With so much uncertainty around a potentially negative outcome, the knee-jerk reaction will be to reduce risk assets. You have a potentially very ugly situation this week."
With the ASE closed, exchange-traded funds tracking Greek equities turned into vehicles of pure speculation. A US ETF slid 17% and the Lyxor ETF FTSE Athex 20 lost 15% in Germany before trading was suspended.
The yield on 10-year Greek bonds surged 423 basis points to 15.08%, the highest since December 2012. In March of that year the yield reached 44.21%. Depositary receipts of National Bank of Greece SA sank 24% in New York.
All but 20 of the shares trading in the Stoxx 600 fell, with banks and automakers leading declines. Spanish, Italian and Portuguese shares slid at least 3.6%. Germany’s DAX Index lost 3.6%.
The yield on Portugal’s 10-year bond jumped 37 basis points to 3.08%, while Spanish and Italian rates each increased 24 basis points.
Euro resilience
Bulgarian bonds slid the most in eastern Europe and Romania’s Eurobonds fell on concern the nations’ banking industries would be rocked by the contagion of a Greek exit from the euro region.
While European equities sank and bonds rallied, reaction in other assets was somewhat muted. The euro erased losses against the dollar on speculation any contagion would be contained, while indicators of banking stress across Europe and in the US suggest relative calm. The US two-year interest-rate swap spread, a key measure of risk for banks, rose Monday only to a high matched last week.
Treasuries rose and the Bloomberg Dollar Spot Index fell as the Greece crisis emboldened traders to cut bets the Federal Reserve will rush to raise interest rates this year after improving US economic data boosted the case for the Fed to raise rates as early as September.
Data Monday showed contracts to purchase previously owned US homes rose in May for a fifth month, indicating recent strength in the real-estate industry will be sustained.
Assured Guaranty Ltd. and MBIA Inc. tumbled at least 14%. The municipal-bond insurers were cut to neutral from buy at BTIG, which said the shares are “unbuyable" because of a possible debt default by Puerto Rico. The commonwealth is struggling to pass a budget that would allow it to make payments on a $72 billion debt load.
The MSCI Emerging Markets Index fell 2%, the most since Dec. 1. A Bloomberg gauge of 20 currencies slid 0.4%, the most in three weeks, with Turkey’s lira and Russia’s ruble losing at least 0.8% against the dollar.
The Shanghai Composite Index tumbled 3.3%, leaving it down 22% from its peak, as signs of an exodus by leveraged investors overshadowed the central bank’s effort to revive confidence with an interest-rate cut. Hong Kong’s Hang Seng China Enterprises Index of mainland shares slid 3%, extending declines from a high on May 26 to 14%. Bloomberg
With assistance from Jeff Sutherland and Joseph Ciolli in New York, Michael G. Wilson in Sydney, Toshiro Hasegawa, Kevin Buckland and Chikako Mogi in Tokyo, Emma O’Brien in Wellington, Cecile Vannucci, Inyoung Hwang, Paul Dobson, Neil Denslow, Andrew Reierson and Stephen Kirkland in London and Nick Gentle in Hong Kong.
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