Wednesday, August 19, 2009

Stocks Fall as China Slumps; Commodities Drop, Yen, Bonds Rise

By Daniel Hauck

Aug. 19 (Bloomberg) -- China’s stocks dropped, briefly dragging the benchmark index into a so-called bear market and triggering declines in equities and commodities worldwide. The yen and Treasuries rose as investors sought less risky assets.

The MSCI World Index of 23 developed nations sank 0.5 percent at 10:10 a.m. in London and futures on the Standard & Poor’s 500 Index slid 1 percent. China’s Shanghai Composite Index slumped as much as 5.1 percent, extending its drop from a 2009 high to more than 20 percent, the common definition of a bear market. Copper fell 1.9 percent on the London Metal Exchange. The yen strengthened against all 16 of the most-traded currencies tracked by Bloomberg. The 10-year Treasury yield dropped to its lowest level since July 14.

The U.S. and Chinese governments pledged more than $13 trillion to combat the worst financial crisis since the Great Depression, helping to fuel a nine-month rally in the Shanghai Composite that pushed the index’s price-to-earnings ratio to almost double the valuations for the S&P 500, according to data compiled by Bloomberg. Earnings for Chinese companies that reported since July 8 have trailed analysts’ estimates by 12 percent on average, Bloomberg data show.

“The focus of global markets is what’s happening in China,” said Bartosz Pawlowski, a London-based emerging-markets strategist at BNP Paribas SA. “China will have to remove liquidity from the market, and it’s likely that commodities will suffer and it means worse sentiment towards risk in general.”

Declining Loans

The Shanghai Composite lost 4.3 percent today as Maanshan Iron & Steel Co. tumbled 7.5 percent. The company posted a half- year loss for the second consecutive period as the global recession curbed demand from homebuilders and automakers.

The Shanghai gauge stands at less than half its record level on Oct. 16, 2007. Stocks have slumped this month as new loans in July declined to less than a quarter of June’s level and companies including Yunnan Copper Industry Co. reported losses. The gauge is 53 percent higher for the full year.

The Dow Jones Stoxx 600 Index of European shares retreated 1.2 percent. A 42 percent rebound since March 9 has left the regional measure valued at 40.2 times the profits of its companies, near the most expensive level since 2003, weekly data compiled by Bloomberg show.

The MSCI Emerging Markets Index dropped 0.7 percent and headed for its lowest closing level since July 22. India’s Bombay Stock Exchange Sensitive Index lost 1 percent, while Indonesia’s Jakarta Composite index fell 2.3 percent. Hungary’s forint led declines in east European currencies against the euro as the tumble in Chinese shares prompted investors to sell emerging-market assets.

Copper, Oil

Copper for delivery in three months fell 1.9 percent to $5,963 a metric ton on the LME. Crude oil retreated 0.8 percent to $68.65 a barrel in New York. China is the world’s second- largest oil user.

Investors are concerned that governments and their central banks will struggle to withdraw stimulus packages that have eased the global economic recession. “Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” billionaire Warren Buffett said. Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

Treasuries advanced as investors sought the relative safety of U.S. bonds, driving the yield on the 10-year note 6 basis points lower to 3.44 percent.

Yen, Pound

The yen strengthened most against the pound after minutes of the Bank of England’s Aug. 6 meeting showed Governor Mervyn King wanted a larger increase in the central bank’s asset- purchase program. The dollar rose versus all 16 major currencies tracked by Bloomberg except the yen.

Confidence in the world economy surged to a 22-month high in August on signs the first global recession since World War II is approaching an end, a Bloomberg survey of users on six continents showed last week.

The U.S. unemployment rate dropped in July for the first time since April 2008, data from the Labor Department showed this month, while the German and French economies unexpectedly grew last quarter, government figures indicated last week.

The cost of protecting corporate bonds from default jumped to the highest in a month, according to JPMorgan Chase & Co. prices for credit-default swaps. Contracts on the Markit iTraxx Europe index rose 3.25 basis points to 103.25, and the risk gauge has now climbed 23 percent since Aug. 10.

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