Stocks Plunge on Debt Concern

The euro slid to a 14-month low, global stocks tumbled for a third day and Spanish and Italian bond yields surged on concern European leaders aren’t doing enough to stem the region’s debt crisis. Italy’s benchmark equity index plunged 4.3 percent to the lowest since July.
The euro sank to as low as $1.2654, while the MSCI World Index of 23 developed nations lost 1.5 percent at 12:25 p.m. in New York to extend its three-day slide to 5.2 percent, the biggest in more than a year. The Stoxx Europe 600 Index plunged 1.5 percent and the Standard & Poor’s 500 Index dropped 0.8 percent to an almost two-month low. Ten-year bond yields soared at least 0.22 percentage points in Spain and Italy and investors demanded 1.63 percentage points to own the Spanish debt instead of benchmark German bunds, the most in 13 years.
The European Central Bank held interest rates steady at a record low of 1 percent today and said it didn’t discuss whether to purchase government bonds to stem the region’s debt crisis, defying market speculation that it would take such measures. U.S. stocks and the euro pared losses as Greece’s parliament approved austerity measures demand by the European Union and International Monetary Fund as a condition of its 110 billion ($140 billion) bailout.
“The ECB seems more concerned about cracks to its credibility than cracks to monetary union,” said Christoph Reiger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. “This approach can be considered consistent with the ECB’s principles. But it risks that the market will still force the ECB’s hand before long.”
2010 Gains Erased
The MSCI Asia Pacific Index today joined the MSCI World Index and the Stoxx 600 Index in erasing its advance for 2010. The S&P 500 is still up 3.7 percent for the year, clinging to gains as better-than-estimated earnings and economic data temper concerns about European debt. The index has slumped 5.1 percent from its high of the year last month.
U.S. benchmark indexes briefly erased losses today as Fed Bank of St. Louis President James B. Bullard said the U.S. labor market is “improving,” while Bernanke said the central bank is working to restore credit to worthy borrowers.
Bank of America Corp., General Electric Co. and Caterpillar Inc. tumbled at least 1.9 percent to lead declines in the Dow Jones Industrial Average as the 30-stock gauge fell below its lowest close since March 22.
Default Swaps Surge
The cost to protect against defaults on U.S. corporate bonds rose to a three-month high. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.8 basis point to a mid-price of 105.8 basis points, according to Markit Group Ltd.
A 110 billion-euro ($140 billion) aid package to avoid a default by Greece has failed to prevent bond yields from rising, driving up borrowing costs for countries including Spain and Portugal. Sovereign debt contagion may spread across Europe, affecting the banking systems of Portugal, Spain and Italy, as well as Greece, Moody’s Investors Service said in a report.
“It’s all about Europe,” said Tom Wirth, senior investment officer for Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York. “There’s a perception that what’s going on in Europe will be dragging the region back into a recession. The question is how much of that is going to be contagious to the rest of the world.”