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Resource stocks hit as Europe debt worries heat up
LOS ANGELES (MarketWatch) -- Brazilian equities dropped nearly 5% Thursday, sliding alongside regional markets, as investors dumped commodities and resource-related stocks as their fears about sovereign-debt troubles in Europe ramped up.
Commodity prices were hit as the U.S. dollar reached a seven-month high against the euro, pushing the dollar index /quotes/comstock/11j!i:dxy0 (DXY 79.88, +0.51, +0.64%) up 0.6% to 79.85.
"The sell-off is simply to a reaction to the stronger U.S. dollar because of renewed fears of sovereign debt problems in Europe, in connection with Greece and also in connection with Portugal and Spain," said Patricia Mohr, a commodity market specialist at Scotiabank Group in Toronto.
A stronger U.S. currency typically pressures oil, gold and other dollar-denominated commodities as it makes them more expensive for holders of other currencies.
The commodity-rich Bovespa index in Brazil slid 4.6%. None of the 65 stocks listed on the index produced price gains in recent trades. Shares of state-run oil giant Petrobras /quotes/comstock/13*!pbr/quotes/nls/pbr (PBR 39.06, -2.34, -5.65%) , which account for 12% of the index, slumped 3% as oil prices dropped 5.3% to $72.92 a barrel. Read more about oil prices.
In Portugal on Thursday, the cost of insuring the nation's debt against default soared to an all-time high. On Wednesday, the European Commission gave cautious approval of Greece's plan to slash its budget deficit over the next three years. Read about euro-zone credit concerns.
Back in Latin America, Argentina's Merval index fell 3.6% on Thursday as local shares of Petrobras fell 5.3% and steel-tubes maker Tenaris /quotes/comstock/13*!ts/quotes/nls/ts (TS 43.40, -1.75, -3.88%) shares lost 3.2%. Banking stocks were also hit, led by Banco Macro /quotes/comstock/13*!bma/quotes/nls/bma (BMA 25.78, -1.78, -6.46%) , down 7.4%, a day after Argentina's president unexpectedly nominated a political ally to head the country's central bank.
Mexico's IPC index fell 1.9%, with shares of copper miner Grupo Mexico /quotes/comstock/!gmexico b (MX:GMEXICO B 27.97, -0.42, -1.48%) down 3.1% and mining concern Industrias Penoles shares declined 3.3%.
Gold for April delivery slumped 4.4% to finish at $1,063 an ounce at the New York Mercantile Exchange. Copper for March delivery fell 3.1% to end at $2.88 a pound.
Meanwhile, shares of Telefonos de Mexico /quotes/comstock/13*!tmx/quotes/nls/tmx (TMX 15.74, -0.93, -5.58%) stumbled 4.8% and led market decliners after the fixed-line operator's fourth-quarter results left investors disappointed.
The results were "mediocre," wrote Rizwan Ali, head of research at Deutsche Bank, in a note to clients. Telmex's earnings before interest, taxes, depreciation and amortization of $12.2 billion pesos was 7.3% below the broker's forecast, resulting in margin of 41.2% compared with its estimate of 44.1%.
"Despite revenues in-line with our forecasts, 5% lower interconnection expenses were not able to offset 12% higher cost of sales and services," wrote Ali.
Chile's IPSA fell 1.7%.
Financial sector ETF set for worst day in a year
NEW YORK (MarketWatch) -- The bellwether ETF tracking the S&P 500 financial sector was headed for its worst percentage decline in almost a year on Thursday. With less than an hour to go in the trading day, the Financial Select Sector SPDR ETF [s; xlf] was off 3.5%. That's the fund's biggest decline since it fell 3.5% on February 23, 2009.
US credit rating at risk, Moody's warns
The credit ratings agency cautioned that if the US were to grow at slower pace levels than expected, the largest economy in the world’s already-extended finances could be over-stretched, in turn damaging its AAA credit rating.
Were the US to lose its AAA rating, it could cause further financial damage, by increasing the cost of borrowing money, a necessary evil for a country predicted to have a $1.56 trillion (£980bn) budget deficit this year.
The warning comes hot on the heels of a similar warning to the UK in mid-January, when Moody’s Pierre Cailleteau, head of sovereign ratings, said the UK needed a budget plan in order to ensure it keeps its high-grade debt status.
However the warning against the US may come as a surprise, given it comes just six weeks after Moody’s said it had no plans to lower the US’s debt rating, with the agency saying that ‘the outlook is stable.’
"Economic growth is very important to our assessment (of the sovereign rating)," Steven Hess, Moody’s senior credit officer in its sovereign risk division, told Reuters.
Mr Hess argued that although President Barack Obama’s recent budget for 2011 and related financial projections are based on strong growth, actual productivity might be somewhat lower.
He said Moody’s is “semi-optimistic” that the US can regain the sort of growth path it experienced before the recession.
The Obama administration’s budget is predicated on 2.7pc growth this year, followed by 3.8pc in 2011.
"The implications would not be good if the US were in for anemic growth for some time to come because the government could have problems for revenue growth," Mr Hess said.
He believes that US economic growth will potentially be restrained by consumer debt levels, with the need to repay those levels stifling spending.
"We think that either economic growth has to be much more vigorous than the administration is assuming so that revenues would be higher or they need to do something further to increase revenues or cut expenditures," Mr Hess continued.
Moody’s warning will be closely studied by the Chinese government, which remains the biggest foreign holder of US sovereign debt.
According to the most recent figures, China held $789.6bn of US treasury bonds, accounting for 60pc of the Asian superpower’s stockpile of foreign reserves.