European stocks fall on speculation
European stocks fell on speculation that a five-month rally outpaced the prospects for corporate profits as the Dow Jones Stoxx 600 Index traded at the most expensive relative to earnings in almost six years. The yen rose against the dollar and the euro.
The Stoxx 600 slid 0.5 percent at 10:09 a.m. in London, while futures on the Standard & Poor’s 500 Index slipped 0.1 percent. The yen advanced against 14 of 16 most-traded currencies tracked by Bloomberg, rising 0.2 percent versus the dollar and the euro. Treasuries were little changed, with the yield on the 10-year note at 3.87 percent.
The 45 percent rally in the Stoxx 600 since March 9 has driven price-earnings valuations to the highest level since September 2003. Industrial metals have climbed for four straight weeks on growing signs the world economy is rebounding from its first recession since World War II. Laura Tyson, an adviser to President Barack Obama, said yesterday the U.S. may be on the cusp of a recovery and the effect of the nation’s stimulus plan should increase this quarter.
“We can expect a lot of volatility” in stocks, Mark Mobius, the executive chairman of Templeton Asset Management Ltd., said in an interview in Kuala Lumpur today. “When you have these rapid increases, almost without correction, you will definitely have a correction at some point.”
Global stocks may drop as much as 30 percent following their recovery from last year’s rout, Mobius said. The MSCI World Index of 23 developed nations slumped 42 percent in 2008, the biggest drop in the gauge’s almost four-decade history.
The MSCI World slipped less than 0.1 percent today. The drop was limited as shares in Asia rallied after Japanese machinery orders rose for the first time on four months. The global measure is valued at 24.9 times the earnings of its 1,655 companies, the most expensive level since December 2003, weekly data compiled by Bloomberg show.
Automakers led the decline in European stocks, dropping 2.7 percent for the biggest retreat among 19 industry groups in the Stoxx 600. Daimler AG, the world’s second-biggest maker of luxury cars, dropped 4 percent in Frankfurt after Morgan Stanley recommended selling the shares.
U.S. futures slipped today after four straight weeks of advances pushed the S&P 500 above 1,000 for the first time since November.
Options traders are increasing bets that the steepest rally in the S&P 500 since the 1930s won’t survive September, historically the worst month for U.S. equities.
VIX May Rise
Traders are betting the VIX, a gauge of expected stock swings, will increase 13 percent in the next five weeks, according to futures prices compiled by Bloomberg. The S&P 500 has rallied 49 percent in five months, pushing valuations to the highest levels since December 2004.
The yen strengthened as a Cabinet Office report showed Japanese machinery orders climbed 9.7 percent in June and the current-account surplus widened, the latest signs that the nation’s worst postwar recession is easing. The pound declined against the dollar and the euro as last week’s decision by the Bank of England to extend its bond-buying program stoked concern the worst of the recession hasn’t passed.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of major trading partners, snapped two days of gains, dropping 0.1 percent to 78.899. Treasuries were little changed, with the yield on the 10-year note rising 1 basis point to 3.87 percent, as the U.S. government prepared to sell $75 billion in debt this week.
Copper for delivery in three months added 0.5 percent to $6,181.50 a metric ton on the London Metal Exchange, extending four consecutive weekly advances. Nickel, tin and lead rose. White sugar advanced 2.7 percent to $551.90 a metric ton in London, after earlier reaching a record $554.30. Crude oil fell 1 cent to $70.92 a barrel in New York trading.
The cost of protecting European high-yield corporate bonds in the credit-default swaps market has plunged since March after soaring in the two years since BNP Paribas SA froze payments on some of its funds.
The Markit iTraxx Crossover Index was at 350 basis points on Aug. 9, 2007, soaring to a peak of 1,173 in March this year. The index was at 575 basis points as of 9:37 a.m. in London, tightening 9 basis points today, according to JPMorgan Chase & Co. prices.
BNP Paribas, France’s biggest lender, halted withdrawals from three investment funds because it couldn’t “fairly” value their holdings, an event seen as the trigger for the biggest credit crisis since the Great Depression.