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While you were sleeping: Stocks hit by China, earnings

Thursday 21st January 2010

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Stocks fell sharply after China moved to curb lending and several more  big US banks signalled that credit losses would continue to pose a threat for some time.

At midday, the Dow Jones Industrial Average was 1.7% lower, the Standard & Poor’s 500 was 1.55% lower and the Nasdaq Composite had shed 1.84%.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’ surged 10.2% to 19.38.

The Dow Jones Stoxx 600 dropped 1.5% to 256.3, its biggest decrease in about six weeks. All of the 18 national benchmarks in Western Europe fell. The FTSE 100 fell 1.7%, Germany’s DAX fell 2.1% and France’s CAC

The European equivalent of the VIX recorded its biggest increase in a month. The VStoxx Index, which measures the cost of using options to protect against declines in the Euro Stoxx 50, surged 15% to 23.41.

The trigger for the pullback was China.

China’s top bank regulator, Liu Mingkang, said some of the country’s banks were asked to curb lending because of capital issues. There was a surge in new loans in the first 10 days of this year, the chairman of the China Banking Regulatory Commission said at a forum in Hong Kong.

The regulator plans to impose new leverage and liquidity ratios on banks, Liu said

The latest move by Chinese authorities is intended to better control the pace and amount of credit. It comes just before China releases its fourth-quarter growth figures.

Concerns about Chinese credit were bolstered by concerns about Greece’s budget issues too.

Greek markets continued to be roiled by the outlook for the nation’s budget deficit. European Commission president Jose Barroso added to those concerns by saying the Greek economy was at a “delicate moment”. Greece’s ASE Index fell 3.4%.

In the US, it was earnings or losses that drove the selling. Bank of America, Morgan Stanley and Wells Fargo reported fourth-quarter results today.

Bank of America’s net loss in the final three months of 2009 more than doubled to US$5.2 billion and it said credit losses remained a problem. It increased its provision for credit losses to US$10.1 billion in the fourth quarter. Losses in its consumer credit card unit widened to US$4.9 billion.

Morgan Stanley lost 1.3% after the world’s biggest brokerage said earnings from continuing operations were below expectations.

Shares in IBM fell 3.6% after an analyst said the company's earnings per share outlook for 2010 implied a slowdown in EPS growth compared to recent years, according to Reuters. IBM reported stronger-than-expected quarterly profit after the bell on Tuesday.

Both the US dollar and yen advanced as demand for higher-yielding assets slid.

The dollar strengthened 1.4% to US$1.4097 versus the euro at 12:24 p.m. in New York, from US$1.4288 yesterday, after earlier trading at US$1.4081, the strongest level since August 19, according to Bloomberg. The yen appreciated 1.3% to 128.60 per euro, from 130.22. The dollar was little changed at 91.26 yen, compared with 91.15.

The New Zealand dollar declined against all of its major counterparts tracked by Bloomberg, decreasing as much as 2.3% to 71.88 U.S. cents.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 1.08% to 78.34.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, rose 0.42% to 282.59.

Gold prices reflected currency market sentiment, with dollar strength sapping the metal's appeal to non-U.S. investors. Spot gold was at US$1122.45 per ounce. U.S. gold futures for February delivery were at US$1122.50, down 1.5% from the settlement in New York.

Spot silver followed gold's lead, falling to US$18.29 per ounce.

US crude contract for February delivery, expiring Wednesday, fell US$1.93 to US$77.09 a barrel by 12:06 p.m. EST (1706 GMT). March crude fell US$1.88 to US$77.44. In London, Brent crude for March delivery fell US$1.60 to US$76.03 a barrel.


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