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Published: Friday, 5/7/2010

Stocks slide as market rout triggers trading-systems concern

BLOOMBERG

BLOOMBERG -- Global stocks slid for a fourth day, erasing 2010 gains for U.S. benchmark indexes, and the bonds of debt-laden nations tumbled after Europe's debt crisis spurred a equity rout yesterday that undermined confidence in trading mechanisms. Oil sank 2.5 percent to lead commodities lower.

The Standard & Poor's 500 Index fell as much as 3 percent before paring losses to 1.5 percent at the 4 p.m. New York close, leaving it down 0.4 percent in 2010. The MSCI World Index sank 2.1 percent. The Stoxx Europe 600 Index fell 3.9 percent to the lowest since November. Greece led a drop in deficit-stricken European nations' bonds, with the yield premium demanded to own the 10-year securities instead of benchmark German bunds rising to a record of 9.65 percentage points. Credit-default swaps on European banks surged to an all-time high.

Regulators are reviewing a plunge that briefly wiped out more than $1 trillion in U.S. market value yesterday as the Dow Jones Industrial Average slid almost 1,000 points before paring losses. Concern over the integrity of the electronic trading mechanisms that caused the volatility overshadowed the biggest growth in U.S. jobs in four years.

“The market is manic,” said Philip Orlando, the New York- based chief equity market strategist at Federated Investors, which manages about $400 billion. “The ECB needs to step in here and do something. If that really becomes true, we start to rally and focus on the terrific jobs report we had this morning. They could have solved this six months ago. There's still a lot of concern about contagion. Investors are scared to death.”

Europe Concern

Stocks have been pummeled the last two weeks amid concern European leaders won't do enough to keep the most indebted nations from defaulting after a 110 billion-euro ($140 billion) rescue package for Greece failed to halt a rise in government borrowing costs. The Stoxx 600 has tumbled 13 percent from its high for the year last month, while the S&P 500 has lost 8.7 percent from its 19-month high on April 23.

The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said they will examine “unusual trading” that contributed to the plunge. Two people with direct knowledge of the matter said regulators plan to examine whether securities professionals triggered the selloff or exploited it for profit.

U.S. losses snowballed yesterday as computerized trades caused some stocks to briefly lose more than 90 percent of their value. The Nasdaq OMX Group Inc. said it will cancel trades of stocks that moved more than 60 percent.

Volatility Surges

Hewlett-Packard Co., American Express Co., Microsoft Corp. and General Electric Co. lost at least 2.5 percent to help lead declines in the Dow today as the average slid to the lowest since February. The Dow capped a 5.7 percent weekly plunge, while the S&P 500 tumbled 6.4 over the past five days. It was the worst week since March 2009, when the S&P 500 reached a 12- year low. The S&P 500 is still up 64 percent since then.

The benchmark index for U.S. stock options headed for its highest close in a year, adding to yesterday's 32 percent surge. The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 25 percent to 40.91. Europe's VStoxx Index, which measures options on the Euro Stoxx 50 Index, rose as much as 42 percent, more than any gain on a closing basis since the Sept. 11, 2001, terror attacks.

The MSCI Asia Pacific Index sank 1.2 percent to the lowest since February 26, while the MSCI gauge of emerging market equities slid 2.2 percent. Brazil's benchmark Bovespa index lost 1.3 percent to the lowest level since October.

The yield on the benchmark 10-year Treasury note rose 0.3 percent to 3.42 percent. The yields still capped the biggest two-week decline since December 2008 as concern that European leaders will be unable to contain Greece's debt crisis sent investors to the safety of U.S. government debt.

Portugal's 10-year bond yield jumped 15 basis points to 6.29 percent, the highest since 1997. Hungary's 10-year yield surged 29 basis points to 7.56 percent.

Euro Rebounds

The euro rebounded from a 14-month low below $1.27 yesterday. The pound fell to the lowest in more than a year against the dollar as results from the U.K. election put the Conservatives on course to win the most seats, without gaining an overall majority, fueling concern a new government won't be strong enough to tackle the budget deficit.

The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc. in 2008. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers soared as much as 40 basis points to 223, according to JPMorgan Chase & Co. The index closed at 212 on March 9, 2009. Swaps on Greece, Portugal, Spain and Italy rose to or near all-time high levels.

Money Markets

The bond and stock market turmoil is spilling over into money markets. Overnight deposits at the European Central Bank rose to a 10-month high as the sovereign debt crisis made commercial banks reluctant to lend to each other. Banks yesterday lodged 290 billion euros in the central bank's ECB's overnight facility at 0.25 percent, up from 288 billion euros the previous day. That's the most since July 3 last year. Deposits have exceeded 200 billion euros for the past 10 days.



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