Wednesday, May 23, 2012


 
   By Jonathan Cheng

U.S. stocks joined a global selloff and the euro dropped to near a two-year low Wednesday as investors focused on contingency plans for a potential Greek exit from the euro zone.

The Dow Jones Industrial Average declined 133 points, or 1.1%, to 12373 in afternoon trading, after falling as many as 191 points earlier in the session. The Standard & Poor's 500-stock index lost 12 points, or 0.9%, to 1304 while the Nasdaq Composite shed 21 points, or 0.7%, to 2818.

Financial and energy stocks led the declines, though technology companies were hit hard by weak earnings from computer maker Dell.

Investor anxiety increased late in Tuesday's session after former Greek prime minister Lucas Papademos said the risk of Greece leaving the euro is real and an exit would have "catastrophic" economic consequences for Greece and far-reaching implications for the rest of the euro zone. He warned Greeks had no choice but to stick with painful austerity measures to avoid such a scenario.

Papademos's comments sapped any optimism that had built up ahead of Wednesday's European Union summit. Reported remarks from other European leaders seemed to echo that sentiment, adding to the increasing fears of spillover from a possible Greek exit from the euro zone.

France's CAC-40 declined 2.6% to a 2012 low and Germany's DAX index lost 2.3% while in London, the FTSE 100 declined 2.5% to a late-November low. Reflecting investors' quest for safety, yields on Germany's 30-year government bond fell to a record low of 1.995%. In Spain, the 10-year borrowing rate moved higher, and spreads between Spanish and German borrowing rates were stretched to near the widest levels in years.

"We've become accustomed to the EU being able to kick the can down the road, but there is a point at which the bond buyers will not have it any more," said Kim Caughey Forrest, a portfolio manager at Fort Pitt Capital Group in Pittsburgh. "None of the remedies to date have actually changed things in Europe. It's been very much a holding pattern."

The worries about Greece sent the euro down to the lowest level seen against the U.S. dollar since the summer of 2010, trading recently at $1.2566. Meanwhile, the U.S. dollar dropped against the yen. Crude-oil futures fell more than 2% to below $90 a barrel, while gold futures tumbled nearly 2% to below $1,550 an ounce.

Demand for U.S. Treasurys sent the yield on the benchmark 10-year note down to 1.7158%, from 1.793% late Tuesday. An auction of five-year Treasury notes sold for 0.748%, the lowest-ever yield for such an auction.

"The concern in Europe is the overriding force in the market and will probably remain that way in the near term," said Rick Klingman, managing director of the interest-rate group at BNP Paribas in New York.

In the U.S. equity market, technology stocks were punished after Dell reported earnings and revenue that fell short of analyst expectations, and provided a disappointing second-quarter revenue outlook.

Dell's stock tumbled 18% and had broad ripple effects across the tech sector. Blue chips Hewlett-Packard, Intel and Microsoft fell 4.7%, 3.1% and 2.8% respectively. Beyond the Dow components, Advanced Micro Devices fell 2.8% and Juniper Networks declined 4.8%. H-P is due to report fiscal second-quarter results after the closing bell.

"People don't want this to be a replay of 2001 and 2002, when tech companies said orders were just delayed and instead sales vanished. People are afraid that those IT dollars will never be spent," said Forrest of Fort Pitt Capital.

Among other tech names, Facebook rose 2.6% after a two-day slide that wiped out 18% from its initial public offering price of $38 a share.

But shares in Morgan Stanley fell 2.7% after the lead underwriter for the Facebook IPO was subpoenaed by Massachusetts Secretary of the Commonwealth William Galvin regarding discussions a company analyst had with institutional investors ahead of the IPO.

Asian markets, which were also hit hard by Europe worries, were broadly lower after the Bank of Japan decided not to adopt additional easing measures. Japan's Nikkei Stock Average slid 2% and Hong Kong's Hang Seng Index lost 1.3%.

In U.S. economic headlines, new-home sales rose 3.3% in April to an annualized rate of about 343,000, better than expectations for a 2.1% increase to 335,000.

Wal-Mart Stores was the lone Dow component in positive territory, edging up 0.7% to a 12-year high.

Toll Brothers edged up 0.9% after the luxury-home builder reported fiscal second-quarter earnings that beat estimates although revenue came in a bit shy.

RailAmerica climbed 6.7% after its board said it is considering strategic alternatives for its business, including a potential sale of the company.

PetSmart surged 12% after its fiscal first-quarter earnings jumped a better-than-expected 34%. The pet-products retailer posted a strong rise in same-store sales and margins improved, and the company boosted its estimates for the year.

-By Jonathan Cheng, The Wall Street Journal; jonathan.cheng@wsj.com

--Matt Phillips contributed to this article.

(END) Dow Jones Newswires

May 23, 2012 14:15 ET (18:15 GMT)