Euro, Stocks, Commodities Fall on European Debt Concern

The euro snapped a three-day rally versus the dollar, stocks and commodities slid and Treasuries rose as Ireland’s financial bailout failed to assuage concern Europe’s debt crisis may spread. Banks led U.S. shares lower as federal agents searched hedge funds in an insider-trading probe.

The euro slid 0.3% to USD 1.3627. The Standard & Poor’s 500 Index lost 0.2% to 1,197.84 and the S&P GSCI Index of commodities declined 0.3%. The costs to protect Irish and Portuguese debt from default surged, while the 10-year U.S. Treasury yield decreased seven basis points to 2.80% before a sale of USD 99 billion of notes this week. After the U.S. close, S&P 500 futures dropped 0.2% at 7 p.m. in New York while Australian and South Korean stocks fell in early trading.

Financial companies led European and U.S. equities lower as Ireland became the second euro member to seek a rescue from the European Union and the International Monetary Fund, a move that may prevent a run on its lenders while threatening its credit rating and government coalition. The Federal Bureau of Investigation raided at least three U.S. hedge funds.

“Deleveraging is sort of like a terrier,” said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, which oversees USD 105 billion. “It keeps annoying you. We’ve addressed Ireland’s problems, but nobody knows who’s next.”

The euro lost 1.1% versus the South Korean won and at least 0.5% versus the currencies of Taiwan, Switzerland and Japan. The dollar strengthened against 10 of 16 major peers.

Financials Lead Declines

Financial companies slumped 1.4% for the biggest decline among 10 industries in the S&P 500. JPMorgan Chase & Co. and Goldman Sachs Group Inc. dropped at least 2.3%. Losses were limited as Amazon.com Inc. led a rally in retailers before the start of the holiday shopping season, while Hewlett Packard Co. climbed 1.8% before reporting earnings after the close of trading. The world’s largest computer maker jumped 3.1% in after-hours trading after forecasting first- quarter profit that topped analyst estimates.

Two Connecticut-based hedge funds, Level Global Investors LP and Diamondback Capital Management LLC, were searched by the FBI today, agency spokesman Richard Kolko said. Agents also executed a search warrant at Loch Capital Management of Boston, according to a person familiar with the probe who declined to be identified because the matter isn’t public. The raids stemmed from a series of insider trading investigations directed by the office of Manhattan U.S. Attorney Preet Bharara, according to a person familiar with the probes.

Insider Trading Probe

The Wall Street Journal reported that the Securities and Exchange Commission and other officials are nearing the end of an investigation into an insider-trading network involving hedge funds, mutual-fund traders and investment bankers. The report late Nov. 19 cited unidentified people familiar with the situation. One of the focuses is whether Goldman Sachs bankers divulged information about health-care acquisitions and other deals, the newspaper said.

The benchmark indexes for U.S. and European stock options snapped three-day losing streaks as investors boosted buying of protection on equities. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 1.8% to 18.37 in New York. The index measures the cost of using options as insurance against declines in the S&P 500. The VStoxx Index, which gauges the cost of protecting against a drop in the Euro Stoxx 50 Index, climbed 6%.

“This FBI probe seems to be gaining some legs,” said Dan Deming, a VIX options trader at Stutland Equities LLC on the floor of the CBOE. “The banking sector is feeling some heat across the board as the feds seem to be stepping up their game a little bit. It’s definitely having an impact.”

Bank Losses

U.S. banks could lose more than USD 100 billion as investors fight to recoup losses from soured mortgages, Barron’s reported over the weekend. The Financial Times reported that the top 35 U.S. banks will be short between USD 100 billion and USD 150 billion after new international capital requirements are imposed.

The Stoxx Europe 600 Index slipped 0.7%, erasing gains of as much as 0.8%. Irish banks led declines on concern that a bailout will dilute existing investor stakes. Bank of Ireland tumbled 19%, while Irish Life & Permanent Plc sank 27%. Porsche SE led auto stocks higher, climbing 4.9%, after Bank of America Merrill Lynch recommended buying the shares, saying the German sports-car maker probably won’t merge with Volkswagen AG. The MSCI Asia Pacific Index rallied 0.6%.

The MSCI Emerging Markets Index climbed 0.2% as the Bombay Stock Exchange’s Sensitive Index jumped 1.9%, its biggest advance since Nov. 4, with Infosys Technologies Ltd., the country’s second-largest software exporter, rising 2.7%. Brazil’s Bovespa slid 1.8%.

Debt Concerns

The Irish rescue package that Goldman Sachs estimates may total 95 billion euros (USD 130 billion) failed to damp speculation that Portugal and Spain would follow Ireland in tapping the fund set up by the EU and IMF after the Greece rescue.

Credit-default swaps tied to Irish government bonds rose 20.3 basis points to 527.4, according to CMA, a data provider. Moody’s Investors Service said it may lower Ireland’s credit rating by more than it previously anticipated as the aid plan threatens to boost the country’s debt.

Default swaps on Portugal jumped 40.8 basis points to 457.6 and Greece was 37 basis points higher at 1,006.4, according to CMA. The Markit iTraxx Crossover Index of swaps on 50 mostly junk-rated European companies climbed 4.7 basis points to 461.5, Markit Group Ltd. prices show.

Irish Yields

The yield on the Irish 10-year bond slipped 4 basis points to 8.31%. The European Central Bank bought Irish government bonds today, according to three people with knowledge of the transactions. A spokeswoman for the ECB in Frankfurt declined to comment.

“The reality is that the structure is in place at the moment to put countries in life support but the missing link still remains the bigger issue of what do you do after that,” Cambiz Alikhani, a portfolio manager at Iveagh Wealth Fund in London, said in an interview. “Until that question is answered we are still in this rolling bailout situation which has been ongoing since 2008.”

Irish Prime Minister Brian Cowen said he will seek national elections early next year after his government passes its 2011 budget, one day after he asked the EU to bail out Ireland’s banking system. Ireland’s Green Party said today it will quit the government after the budget is passed, leaving Cowen without a majority in parliament and raising the prospect of January elections. Irish voters “feel misled” by the government, Green Party leader John Gormley said at a press conference in Dublin.

Treasuries

The yield on the two-year Treasury note slipped 5 basis points to 0.47%. The U.S. auctions USD 35 billion of the debt today, followed by sales of five-year securities tomorrow and seven-year notes in two days.

Cotton, copper, gasoline and coffee fell at least 1.4% to lead declines in commodities. Crude oil fell 0.3% to USD 81.74 a barrel in New York.

Cotton declined to a four-week low in New York amid speculation that global demand will decline as China, the biggest importer, takes steps to slow growth and as planting expands in India. Cotton for March delivery dropped as much as 4.9% to USD 1.1715 a pound in New York. The fiber fell 8.2% last week, the most since February 2009.

The New Zealand dollar dropped against all 16 of its most- traded peers, weakening 0.5% to 77.45 U.S. cents. S&P lowered the nation’s credit outlook on its AA+ rating to negative, saying in a statement that “the main risk to the ratings would be a significant weakening in the credit quality of New Zealand’s banking sector.”