While you were sleeping: Wall St snaps gains, Bernanke warns on deficits

Thursday 4th June 2009

Stocks on Wall Street snapped a four-day rally after figures showed companies cut more jobs than expected last month while a measure of home loan applications tumbled and the service sector stayed on contraction.

The Dow Jones Industrial Average dropped 0.8% to 8675.24 and the Standard & Poor’s 500 declined 1.4% to 831.76. The Nasdaq Composite fell 0.6% to 1825.92.

Aluminium producer Alcoa Inc. led decliners on the Dow as prices of metals fell. Refinery operator Valero Energy Corp. sank 18% to US$18.40, the biggest slide on the S&P 500, after forecasting a second-quarter loss and announcing plans to raise more capital. Rival refinery Tesoro Corp. dropped 13% to US$15.17.

American Express declined 0.9% to US$24.48 after chief executive Kenneth Chenault said the credit-card company has met requirements to repay funds from the Troubled Asset Relief Program and selling USD$500 million of stock last week.

US companies cut a greater-than-expected 532,000 jobs in May, according to ADP Employer Services. Figures for April were revised to show more jobs were axed.

The ADP report heralds the Labor Department’s monthly jobs report, due on Friday in the US, which is expected to show non-farm payrolls shrank by 520,000 in May, pushing the jobless rate to 9.2%, a 25-year high.

US Treasuries rose after Federal Reserve Chairman Ben Bernanke warned the Obama administration to rein in its soaring budget deficits, forecast to reach US$1.85 trillion this year, which risk undermining financial stability.

The yield on 10-year government bonds fell 8 basis points to 3.54%. The spread between two-year and 10-year yields narrowed to 2.66 percentage points.

Bernanke said the government can’t continue borrowing at current rates to plug its deficits.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke told the House Budget Committee.

He said rising Treasury yields in recent weeks “appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings.”

Bill Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co., said investors should exit U.S. dollars to beat the rush of central banks and funds fleeing from soaring federal budget deficits.

America’s “fortune-producing capabilities seem to be declining, which might suggest that its relative standard of living is doing so as well,” Gross said in his June investment outlook, posted on Pimco’s website.

The US dollar rose against the euro as the economic data sapped demand for higher yielding, or riskier assets after the disappointing economic data, which spurred demand for the world’s reserve currency.

The euro also weakened after figures showed the euro-region’s economy slipped further into recession in the first quarter.

The greenback strengthened to $1.4127 per euro from $1.4132 and was at 95.84 yen from 95.76. The euro fell to 135.41 yen from 136.97.

Stocks in Europe dropped after the European Union’s statistics reported the region’s economy shrank 2.5% in the first quarter. Household consumption fell 0.5% while investment spending fell 4.2%. Exports declined 8.1% and imports tumbled 7.2%.

The Dow Jones Stoxx 600 fell 2% to 209.94, the biggest decline in more than two weeks. Companies on the index are valued at 25.5 times earnings, making them the most expsneive since 2004, Bloomberg reported.

French builder and mobile phone company Bouygues SA dropped 7.9% after reporting a 29% drop in profit.

STMicroelectronics, the biggest maker of computer chips in Europe, fell 4.3% after industry association WSTS Inc. forecast a 22% decline in global sales this year.

The UK’s FTSE 100 fell 2.1% to 4383.42 and France’s CAC 40 dropped 2% to 3309.65. Germany’s DAX 30 fell 1.7% to 5054.53.

Copper fell from a seven-month high on concern prices have rallied further than the outlook for demand warrants after Rio Tinto said the global recession may weigh on the metal’s price.

Copper futures for July delivery fell 3.7% to US$2.212 a pound on the New York Mercantile Exchange.

Crude oil slipped after figures showed growing inventories in the US Stockpiles rose by 2.9 million barrels last week, according to the U.S. Energy Information Administration.

US crude slipped US$3.18 to US$65.37 a barrel. Gold was at US$961.4 an ounce.

Businesswire.co.nz

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