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While you were sleeping: Stocks give up on Spain

Thursday 1st July 2010

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US equities gave up earlier gains after Moody’s Investors Service put Spain’s credit rating on review for possible downgrade.

Moody’s placed Spain’s Aaa local and foreign currency government bond ratings on review for possible downgrade, spurring concern that Europe’s debt crisis might deepen.

The euro had rallied earlier and the S&P 500 rebounded from an eight-month low on signs that funding pressures on European lenders were easing and American manufacturing was withstanding turmoil in financial markets.

In late trading, the Standard & Poor’s 500 Index slid 0.07% after climbing 0.7% earlier, while the Dow Jones Industrial Average declined 0.14%, and the Nasdaq Composite edged 0.14% lower.

On the final trading day of the second quarter, major indexes were on track for their worst three-month performance in at least five. For the quarter, the S&P is down 10.5%, the Dow has fallen 8.8% and the Nasdaq has lost 10.3 %.

"This quarter was a legitimate reaction to increasing concerns of a slowdown in the rate of recovery in the second half of 2010,” Jim Awad, managing director at Zephyr Management in New York, told Reuters.

Equities had rallied earlier following a report that American business activity grew for a ninth month and signs that European lenders were stronger than investors speculated.

The European Central Bank said it would lend the region’s banks less money than economists had forecast. The Institute for Supply Management-Chicago Inc’s business barometer showed manufacturing was overcoming turmoil in financial markets.

Among the most active stocks on Wall Street were Kraft Foods Inc, Hewlett-Packard Co and Verizon Communications Inc.

Delta Airlines rose more than 6% after CEO Richard Anderson said his industry was moving into an “up cycle”. Continental Airlines Inc rose 6.3% and US Airways Group gained 5%.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, dropped 3.78% to 32.84.

TheVIX may remain in the 25 to 40 range in the “near term” and remain above 30 for “several weeks, Michael Purves, head of derivatives research at the New York-based firm, wrote in a report, according to Bloomberg.

“We see volatility in European headlines, volatility in Chinese economic news flow and the potential for slowing US recovery into the second half will keep complacency in check,” Purves wrote.

The Stoxx Europe 600 Index ended 0.2% lower at 243.32, bringing its decline since the end of March to 7.8%.

The UK’s FTSE 100 added 0.05%, Germany’s DAX gained 0.23% and France’s CAC 40 rose 0.29%.

Among the most active stocks in Europe were Rio Tinto Group, BHP Billiton, Tesco, Banco Santander SA and Credit Agricole SA.
US Treasuries fell, pushing the two-year yield up from a record low, as banks sought less cash from the European Central Bank than economists forecast and a gauge of US manufacturing indicated a ninth month of growth.

The yield on the two-year note increased four basis points, or 0.04 percentage point, to 0.64%  at 2.29pm in New York, according to BGCantor Market Data.

Treasuries have returned 5.8% in the first six months of 2010, Bank of America Merrill Lynch indexes show, according to Bloomberg News. That’s the biggest rally since 1995, when the US Federal Reserve was preparing to cut interest rates to encourage growth.

Three-month euro Libor rose by 1.812 basis points to 0.70625%, fixing at its highest level since late September 2009.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.14% to 86.01.

The euro rose after banks borrowed less money than expected from the European Central Bank, soothing concerns over European banks' funding issues.

The ECB lent banks 131.9 billion euros (US$161.4 billion) in three-month funds, well below expectations of demand of 210 billion euros, according to a Reuters poll. Banks face the repayment of close to half a trillion euros in 12-month funds on Thursday.

The tender results are seen as a gauge of how reliant European banks are on ECB emergency funding. Spanish, Portuguese and Greek banks have been the biggest users of the facilities.

Even so, the euro remains on track for a loss of 9.3% this quarter, the third straight quarterly decline.

The euro last traded at US$1.2262, up 0.7%. It rose 1.4% against sterling.

Against the yen, the euro gained 0.8% at 108.65 yen, after hitting an 8-1/2-year low on Tuesday.

So far this year, the euro is still down 14.3% against the greenback, down 18.3% against the yen and down 10.9% versus the Swiss franc

Against the yen, the US dollar was little changed at 88.58.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials,  rose 0.89% to 258.56.

Oil dropped after a US government report showed fuel inventories rose last week, outweighing a decline in crude stocks in the world's top consumer.

Gasoline stocks unexpectedly rose 537,000 barrels and distillates inventories gained 2.46 million barrels, the Energy Information Administration report said. Crude stocks, however, fell by 2.01 million barrels.

US crude for August fell 37 cents to US$75.57 at 1459 GMT.

ICE Brent crude fell 27 cents to US$75.17.

Crude oil prices have fallen more than 9% in the last three months, posting the first quarterly drop since the peak of the financial crisis in late 2008.

Gold declined after a report showed US private sector employers added fewer jobs than expected in June.

The precious metal is still set to be the best-performing metal of the second quarter, however, amid concern over global economic growth and the stability of the banking system.

Spot gold was bid at US$1,236.82 an ounce at 1322 GMT, against US$1,238.00 late in New York on Tuesday. US gold futures for August delivery declined US$4.50 an ounce to US$1,237.90.

Among other precious metals, silver was bid at US$18.47 an ounce against US$18.46, platinum at US$1,523.20 an ounce versus US$1,539.50, and palladium at US$440 against US$450.

US copper futures closed the second quarter of 2010 more than 17% lower amid signs pointing to slower growth in the second half of the year.

Copper for September delivery ended up 2 cents at US$2.9505 per pound on the COMEX metals division of the New York Mercantile Exchange.

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