Capital Gold Group Report: Stocks Slide as Market Rout Triggers Trading-Systems Concern

May 7 (Bloomberg) -- Stocks slid for a fourth day, erasing 2010 gains for U.S. benchmark gauges, and the bonds of debt- laden nations tumbled after Europe’s debt crisis spurred an equity rout yesterday that undermined confidence in trading systems. Oil sank, capping the biggest weekly drop since 2008.

The Standard & Poor's 500 Index fell as much as 3 percent before paring losses to 1.5 percent at the 4 p.m. New York close, leaving it down 0.4 percent in 2010. The MSCI World Index sank 2.3 percent. The Stoxx Europe 600 Index fell 3.9 percent to the lowest level since November. Greece led a drop in deficit- stricken European nations’ bonds, with the yield premium demanded to own the 10-year securities instead of benchmark German bunds rising to a record 9.65 percentage points.

Regulators are reviewing a plunge that briefly wiped out more than $1 trillion in U.S. equity value yesterday as the Dow Jones Industrial Average slid almost 1,000 points before paring losses. Concern over the integrity of the trading mechanisms that may have exacerbated the drop overshadowed the biggest growth in U.S. jobs in four years. Credit-default swaps on European banks surged to an all-time high and the benchmark gauge of U.S. stock volatility capped a record weekly gain.

“The market is manic,” said Philip Orlando, the New York- based chief equity market strategist at Federated Investors, which manages about $400 billion. “The ECB needs to step in here and do something. If that really becomes true, we start to rally and focus on the terrific jobs report we had this morning. They could have solved this six months ago. There’s still a lot of concern about contagion. Investors are scared to death.”

Europe Concern

Stocks have been pummeled the last two weeks amid concern European leaders won’t do enough to keep the most indebted nations from defaulting after a 110 billion-euro ($140 billion) rescue package for Greece failed to halt a rise in government borrowing costs.

The Stoxx 600 has tumbled 13 percent from its high for the year last month, while the S&P 500 has lost 8.7 percent from its 19-month high on April 23.

The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said they will examine “unusual trading” that contributed to the plunge. Two people with direct knowledge of the matter said regulators plan to examine whether securities professionals triggered the selloff or exploited it for profit.

U.S. losses snowballed yesterday as computerized trades caused some stocks to briefly lose more than 90 percent of their value. The Nasdaq OMX Group Inc. said it will cancel trades of stocks that moved more than 60 percent.

Trade Routing

One SEC memo, according to people who saw it, discusses a theory raised yesterday by NYSE Euronext spokesman Ray Pellecchia, who said sudden price moves in multiple stocks reached so-called liquidity replenishment points. That prompted the exchange to slow trading in those shares as it tried to ensure an orderly market. Such incidences allow other exchanges to ignore NYSE price quotes.

Trades sent to electronic networks then fueled the drop, Larry Leibowitz, chief operating officer of NYSE Euronext, said. While the first half of the Dow’s 998.5-point plunge probably reflected normal trading, the decline extended as orders went to venues lacking enough buyers to match the trades, he said in an interview yesterday.

‘An Overhang’

“The investigation of yesterday’s trading is definitely an overhang,” said Quincy Krosby, chief market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees about $667 billion.

Hewlett-Packard Co., American Express Co., Microsoft Corp. and General Electric Co. lost at least 2.5 percent to help lead declines in the Dow today as the 30-stock average slid to the lowest since February. The Dow capped a 5.7 percent weekly plunge, while the S&P 500 tumbled 6.4 over the past five days. It was the worst week for both since March 2009, when the S&P 500 reached a 12-year low. The S&P 500 is still up 64 percent from that bear-market bottom.

The benchmark index for U.S. stock options closed at a 13- month high after surging 86 percent this week, the biggest advance in its two-decade history. The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 25 percent to 40.95 today. Europe’s VStoxx Index, which measures options on the Euro Stoxx 50 Index, rose as much as 42 percent today, more than any gain on a closing basis since the Sept. 11, 2001, terror attacks.

The MSCI Asia Pacific Index sank 1.2 percent to the lowest since February 26, while the MSCI gauge of emerging market equities slid 2.3 percent. Brazil’s benchmark Bovespa index lost 0.9 percent to a three-month low.

Treasury Yields

The yield on the benchmark 10-year Treasury note rose 0.3 percent to 3.42 percent. The yields still capped the biggest two-week decline since December 2008 as concern that European leaders will be unable to contain Greece’s debt crisis sent investors to the safety of U.S. government debt.

Portugal’s 10-year bond yield jumped 15 basis points to 6.29 percent, the highest since 1997. Hungary’s 10-year yield surged 29 basis points to 7.56 percent.

Equities today pared earlier losses amid speculation the European Central Bank will announce measures to improve liquidity in the financial system to stem the region’s debt crisis. An ECB spokesman declined to comment on the speculation. Euro-region leaders meet in Brussels tonight to endorse the Greek bailout.

The euro rebounded from a 14-month low below $1.27 yesterday, climbing 1 percent to $1.2741. The dollar retreated against 12 of 16 major counterparts, led by declines of more than 1 percent against the Swedish krona, South African rand, Mexican peso and Canadian dollar.

Default Swaps Surge

The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc. in 2008. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers soared as much as 40 basis points to 223, according to JPMorgan Chase & Co. The index closed at 212 on March 9, 2009. Swaps on Greece, Portugal, Spain and Italy rose to or near all-time high levels.

The bond and stock market turmoil is spilling over into money markets. Overnight deposits at the European Central Bank rose to a 10-month high as the sovereign debt crisis made commercial banks reluctant to lend to each other. Banks yesterday lodged 290 billion euros in the central bank’s ECB’s overnight facility at 0.25 percent, up from 288 billion euros the previous day. That’s the most since July 3 last year. Deposits have exceeded 200 billion euros for the past 10 days.

‘Nerves Are Frayed’

“Nerves are frayed,” said Prasad Patkar, who helps manage about $1.7 billion at Platypus Asset Management Ltd. in Sydney. “After the global financial crisis, it’s not irrational for investors to shoot first and ask questions later. We need the ECB to come out decisively and put a stop to this before things spin out of control.”

The cost of borrowing dollars between banks for three months in London climbed to the highest level since August. The London interbank offered rate, or Libor, rose to 0.428 percent from 0.374 percent, according to the British Bankers’ Association.

Crude oil for June delivery fell $2, or 2.6 percent, to settle at $75.11 a barrel on the New York Mercantile Exchange, the lowest price since Feb. 12. Futures are down 13 percent for the week, the biggest drop since the week ended Dec. 19, 2008.

Gold for June delivery rose 1.1 percent to $1,210.40 an ounce, near a record in New York, on demand for the metal as a haven. Silver jumped the most since November.

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