* Spanish, Italian yields rise on euro zone concerns
* New Greek election poll shows leftist SYRIZA has taken lead
* European Commission calls for banking union
* Research in Motion tumbles in premarket
* Indexes off: Dow 1.1 pct, S&P 1.2 pct, Nasdaq 1.4 pct
NEW YORK, May 30 (Reuters) - U.S. stocks dropped on Wednesday, as rising bond yields for Italy and Spain and the latest poll results in Greece worsened fears about a spiraling of the euro zone's debt crisis.
The region's fiscal woes sent the yield on the safe-haven 10-year U.S. Treasury note to the lowest in 60 years and the euro to its lowest level in 23 months against the dollar. U.S. equities have been closely tethered to the currency's fortunes, with a 50-day correlation between the euro and the S&P 500 index at 0.91.
"The longer they (Europeans) drag it out, the less severe are the ramifications of a break-up and then who actually ends up exiting - so much of this is unwritten it is hard to put any sort of odds on how this plays out," said Nathan Snyder, portfolio manager at Snow Capital Management in Sewickley, Pennsylvania.
Yields on 10-year Spanish bonds moved closer to the 7 percent level, a point at which other nations in the bloc were forced to seek a bailout.
Spain is expected to issue new bonds shortly in an effort to fund its troubled banks despite the increased borrowing costs.
Adding to the concern, Italian 10-year yields topped 6 percent for the first time since January at a bond sale, raising concerns the region is vulnerable to a contagion.
Investors were given cause for optimism after the European Commission said the the euro zone should move toward a banking union, consider eurobonds and the direct recapitalization of banks from its permanent bailout fund as well as boost growth and cut debt.
But the cheering was short-lived after the latest poll from Greece showed the radical leftist SYRIZA party has taken the lead over the pro-bailout conservatives ahead of a national parliamentary election next month that may determine whether the debt-laden country stays in the euro zone.
"It seems inevitable the euro has got to break up, it's just how long can they drag it out and what are the ramifications," said Snyder of Snow Capital Management.
The CBOE Volatility index jumped more than 10 percent, it's biggest spike since mid-April.
The PHLX oil service sector dropped 2.9 percent with U.S. crude down more than 2 percent as the euro zone's debt problems and signs China was not planning a large stimulus package stoking demand fears. National Oilwell Varco Inc lost 2.6 percent to $68.19.
European shares were buffeted by the conflicting headlines, with the latest Greek poll pushing the FTSEurofirst 300 index down more than 1 percent.
The Dow Jones industrial average dropped 135.21 points, or 1.07 percent, to 12,445.48. The Standard & Poor's 500 Index lost 16.32 points, or 1.22 percent, to 1,316.10. The Nasdaq Composite Index slumped 40.97 points, or 1.43 percent, to 2,830.02.
U.S. economic data showed contracts to purchase previously owned U.S. homes unexpectedly fell 5.5 percent in April to a four-month low, dealing a blow to more recent optimism the housing sector may have hit a bottom.
Research In Motion Ltd tumbled 10.6 percent to $10.05 as the biggest percentage decliner on the Nasdaq 100 index. The company hired bankers for a far-reaching strategic review and to look for partnerships as the BlackBerry-maker warned it would likely report a shock fiscal first-quarter operating loss.
Apple Inc slipped 0.9 percent to $567.14 after Chief Executive Tim Cook, speaking at the All Things Digital conference said technology for televisions was of "intense interest" but stressed the company's efforts would unfold gradually amid speculation the iPad and iPhone maker was on the brink of unveiling a revolutionary iTV.
Macy's Inc reported better than expected May same-store sales on Wednesday, helped by its growing e-commerce business. Shares slipped 2.9 percent to $37.86.
Pep Boys-Manny, Moe & Jack plunged 21.7 percent to $8.68 in premarket after the automotive parts and service chain said the sale of the company to private equity firm Gores Group has been called off.
Asian Stocks Drop as Euro Slides to a Two-Year Low - Bloomberg
Asian, European Stocks Decline as Euro Slides to Two-Year Low
Simon Dawson/Bloomberg
The euro has lost 5.8 percent this month, headed for its largest monthly drop since September.
The euro has lost 5.8 percent this month, headed for its largest monthly drop since September. Photographer: Simon Dawson/Bloomberg
May 30 (Bloomberg) –- Peter Tchir, founder of TF Market Advisors, talks about U.S. stocks, the euro-zone debt crisis and investment strategy. Tchir also discusses Facebook Inc.'s share price with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
May 30 (Bloomberg) -- China has no plan to introduce stimulus measures to support growth on the scale unleashed during the depths of the global credit crisis in 2008, according to the nation’s state-run Xinhua News Agency. Stephen Engle reports from Beijing on Bloomberg Television's "On the Move Asia" with Rishaad Salamat. (Source: Bloomberg)
May 30 (Bloomberg) -- Andrew Sheng, president of Fung Global Institute and chief adviser for the China Banking Regulatory Commission, talks about the outlook for the Chinese economy and the euro-zone debt crisis. Sheng speaks with Susan Li, Rishaad Salamat, Zeb Eckert and Mia Saini on Bloomberg Television's "Asia Edge." (Source: Bloomberg)
May 30 (Bloomberg) -- Michael O’Sullivan, head of portfolio strategy at Credit Suisse Private Banking, talks about Europe's sovereign debt crisis and the implications for global financial markets, and his investment strategy. He speaks from Sydney with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
May 30 (Bloomberg) -- David Forrester, a currency strategist at Macquarie Bank Ltd., talks about the impact of Europe's debt crisis on the euro and the outlook for the Australian dollar. Forrester speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
May 30 (Bloomberg) -- Mary Ann Bartels, head of technical and market analysis at Bank of America Merrill Lynch, discusses the outlook for the U.S. stock market and investment strategy. Bartels speaks with Sara Eisen on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
The U.S. Treasury 10-year yield slid to a record while stocks tumbled and the euro weakened to a two- year low as Spain struggled to recapitalize its banks and American home sales declined. Italian and Spanish bonds fell.
Ten-year note yields lost as much as 10 basis points to 1.64 percent as of 10:34 a.m. in New York. The MSCI All-Country World Index (MXWD) slid 1.4 percent and the Standard & Poor’s Index retreated 1.1 percent. The euro depreciated 0.7 percent to $1.2411. The yield on the 10-year Italian bonds jumped 15 basis points and the rate on Spanish 10-year debt rose to a euro-era record relative to German bunds. The S&P GSCI gauge of raw materials fell 1.6 percent to the lowest since October as oil tumbled below $89 a barrel.
Concern about Europe’s debt crisis deepened after Italy failed to meet its maximum target at a debt sale, Spain struggled to bolster its banks and a Greek poll showed increased support for anti-austerity parties. The National Association of Realtors said the index of pending U.S. home resales dropped 5.5 percent from the prior month.
“You have a market that’s largely being driven by fear,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “The U.S. will continue to be the primary recipient of the safe-haven bid. People are clearly more confident in Treasuries. We still have the most liquid, capital markets.”
The 10-year Treasury yield, which is a benchmark for everything from mortgages to corporate bonds, fell in each of the nine weeks through May 18, the longest stretch since 1998. the 30-year bond yield dropped 11 basis points to 2.74 percent, the lowest level since October. Seven-year notes reached a record low 1.0785 percent.
Rally Erased
The S&P 500 slid the most on a closing basis since May 17 today and erased yesterday’s 1.1 percent rally. Caterpillar Inc., Alcoa Inc. and Chevron Corp. lost more than 2 percent for the biggest declines in the Dow Jones Industrial Average.
Research In Motion Ltd. slid 6.6 percent to help lead Canadian stocks lower as the maker of the BlackBerry smartphone forecast a surprise operating loss for the first quarter and hired banks to advise on strategic options.
The Stoxx Europe 600 Index (SXXP) declined 1.3 percent as Spain’s IBEX 35 Index sank 1.5 percent to a nine-year low and Italy’s FTSE MIB Index sank to the lowest since March 2009 on a closing basis.
Spain Banks
The European Central Bank rejected a Spanish plan to recapitalize the state-owned lender Bankia group, the Financial Times reported. The ECB said today it hasn’t been consulted by Spain on any plans to recapitalize a “major Spanish bank” and that it has “not expressed a position on plans by the Spanish authorities” for such a move.
The European Commission called for direct euro-area aid for troubled banks, touted common bond issuance and sided with Spain in proposing that the euro’s permanent bailout fund inject cash to banks, according to policy recommendations released today in Brussels.
The euro fell to as low as $1.2407, the weakest since July 1, 2010, and slid 1.4 percent versus the yen for its seventh consecutive decline.
Credit-default swaps on Spain climbed 19 basis points to 580, helping drive the Markit iTraxx SovX Western Europe Index of swaps on 15 governments 4.5 basis points higher to 319.2.
Spain’s 10-year yield climbed 16 basis points, with the spread over bunds widening to as much as 539 basis points, or 5.39 percentage points. The yield on the German 10-year security fell as much as eight basis points to 1.276 percent, the lowest on record.
‘Need for Burden Sharing’
“Spain looks to have gotten to the point where it cannot bear the burden alone,” David Mackie, chief economist at JPMorgan Chase & Co. in London, wrote in a report. “The Spanish government recognizes the need for burden sharing, but it does not want the kind of burden sharing that was made available to Greece, Ireland and Portugal.”
Crude for July delivery decreased 2.8 percent to $88.26 a barrel. Prices are down 16 percent this month, the biggest drop since December 2008. A report tomorrow may show U.S. stockpiles climbed to the highest level since 1990. Brent crude dropped below $105 a barrel in London for the first time since first time this year. Copper slipped 2 percent in New York.
The MSCI Emerging Markets Index (MXEF) slid 1.5 percent as benchmark gauges in Russia, Hungary, Taiwan and Thailand fell more than 1 percent. The Hang Seng China Enterprises Index (HSCEI) of Chinese companies listed in Hong Kong dropped 1.7 percent after Xinhua News Agency said yesterday that China has no plans to introduce stimulus measures on the scale seen during the global financial crisis. India’s Sensex Index declined as Tata Motors Ltd., the country’s largest automaker, sank 12 percent after its main Jaguar Land Rover unit posted earnings that missed analysts’ estimates.
To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
Pakistan ‘heading for new financial crisis without reforms’ - DAWN Group
Finance Minister Abdul Hafeez Shaikh. — Photo by AFP
ISLAMABAD: Minuscule tax revenues, mismanagement and overgenerous subsidies mean Pakistan is heading for a new financial crisis, say diplomats and analysts, with this week’s budget unlikely to offer any respite.
The budget deficit stood at 6.6 per cent of GDP last year, according to the central bank, the State Bank of Pakistan (SBP), which warned that government borrowing was crowding out the private sector from access to credit.
That reduces the prospects for economic growth in a country that is on the front line of the war against al Qaeda and where more than 5,000 people have been killed in bomb and gun attacks by insurgents since 2007.
External forecasts for the current fiscal year see the budget deficit rising to about seven per cent of GDP, while economists warn the government is running out of ways to fund it — and reluctant to embrace reform with polls looming.
Some see little alternative to a major financial crisis or a return to the IMF, which bailed out Pakistan with an $11.3 billion loan package in 2008 that stopped last November after Islamabad rejected strict reform demands.
“I think it’s possible they could have a real financial crisis by the middle of this year or the fall. I don’t think it’s a question of if, but when they go back to the IMF,” one Western diplomat said.
Pakistan’s tax revenues are among the lowest in the world at just 9.8 per cent of GDP in fiscal 2010-2011, says the Asian Development Bank, and less than two per cent of the population pays tax on their income.
On top of this, the government shells out huge sums on electricity subsidies — about 1.5 per cent of GDP in 2010-11, according to the IMF — for a sector so blighted by mismanagement that most of the country suffers crippling power cuts.
Pakistan has also missed out on payments from the United States for its efforts to fight militancy under the Coalition Support Fund (CSF).
This brought around $8.8 billion into Pakistan’s coffers between 2002 and 2011, including $1.5 billion in 2009-10, but Islamabad stopped claiming the money as ties with Washington collapsed in the wake of the raid that killed Osama bin Laden last year.
“There’s not really any money coming in, and that being the case, the government is financing itself by borrowing from the local banks and the local banks aren’t seeing deposits coming in to keep up,” said Liz Martins, an economist with HSBC.
The pressure on finance houses “means they have very limited money to lend to the private sector,” she said.
“There’s no money coming from the IMF, no money coming from the bond markets, and international investors are very cautious.”
Islamabad borrowed 365 billion rupees ($4 billion) from the banking system — both private banks and the SBP — in the first half of the current financial year, the central bank said in its second quarter economic report.
With inflation already running at around 11 per cent, the alternative of printing money to pay debts opens the way to the nightmare of hyperinflation.
The IMF says Pakistan needs to raise tax revenues substantially to reduce the deficit sustainably, but with an election due within months analysts do not expect Finance Minister Abdul Hafeez Shaikh to follow its advice in his budget on Friday.
“I don’t think the government is able to bear the terms that come with going back to the IMF,” said Sartaj Aziz, former finance minister and vice chancellor of Beaconhouse National University.
The situation was already serious, he warned. “The total expansion of currency is higher than ever, so it is already reaching dangerous levels. It has to be arrested by drastic remedial measures,” he said.
Officials from the finance ministry were repeatedly contacted by AFP, but declined to comment on how they planned to finance the deficit.
In Pakistan, once a general election is called, an interim government takes power for three months while campaigning is under way and Aziz said he thought this would give the government a way to duck difficult budget decisions.
“I think the government will be happy to wait until the election is called and hand the problem over to the caretaker government,” he said.
STOCKS NEWS EUROPE-'Death cross' triggered on Euro STOXX 50 - Reuters UK
Charts show the blue chip Euro STOXX 50 index's 50-day moving average crossing below the 200-day moving average in early trading on Wednesday, a strongly bearish technical signal called 'death cross', which usually means further losses in the index six months down the road.
"This confirms the current medium-term trend, and at the same time, there isn't any sign whatsoever of a trend reversal for European indexes, so it's crystal clear that this downtrend is set to continue," saiys Vincent Ganne, technical analyst at TradingSat, in Paris.
The Euro STOXX 50 index last week halted a sell-off started in mid-March during which it plunged 19 percent, and has been testing its downward trendline over the past two sessions, but it failed to close above it, sending a negative signal.
"For most European markets, last week's bounce was quite weak and so far the move has been developing into a sideways pattern, which has a corrective and therefore a bearish character in the bigger picture," Michael Riesner, head of equity technical analysis at UBS Investment Bank, writes in a note.
"Even if we should see a temporary extension of the current bounce early this week, given the weak patterns and structures in the market, we continue to see the risk of at least one more down leg into June, which still suggests prices below 2,100 in the Euro STOXX 50."
The index's next big support level is at 2,066 points, which represents a low hit in late November.
Reuters Messaging: blaise.robinson.thomsonreuters.com@reuters.net
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