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Stocks Decline, Led by China on Earnings; Yen Gains on DPJ Win
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By Adria Cimino and Daniel Hauck

Aug. 31 (Bloomberg) -- Stocks retreated from Shanghai to Frankfurt on speculation the six-month rally has outpaced prospects for earnings growth. The yen strengthened after yesterday’s landslide election victory by the Democratic Party of Japan.

The MSCI World Index of 23 developed nations slid 0.5 percent at 12:20 p.m. in London, trimming its fifth monthly advance since the end of February. Futures on the Standard & Poor’s 500 Index fell 0.6 percent, while China’s Shanghai Composite Index tumbled 6.7 percent, the most since June 2008, and entered a so-called bear market. The yen strengthened against all 16 most-traded currencies. The 10-year Treasury bond rose, pushing its yield 2 basis points lower.

Equities slid after valuations for Europe’s Dow Jones Stoxx 600 Index and the MSCI Asia Pacific Index reached the most expensive levels in six years, as investors speculated that lending curbs in China will damp growth in the world’s third- largest economy. The tumble in Chinese stocks increased demand for the relative safety of the yen. The Japanese currency was also boosted as the DPJ’s victory marked an end to single-party government that lasted almost unbroken for half a century.

“There’s a wide consensus saying that sentiment has been running ahead of fundamentals,” said Vincent Juvyns, a Brussels-based strategist at ING Investment Management, which oversees about $476 billion. The recovery in stocks “is probably too fast and too strong,” he said in a Bloomberg Television interview.

Rising Valuations

The Stoxx 600 fell 0.5 percent, reducing its monthly advance to 5 percent. The rally has driven the price-earnings ratio for the index up to 48.6, the highest level since June 2003, according to weekly data compiled by Bloomberg.

Allied Irish Banks Plc fell 7.4 percent on speculation that the Irish government may cut initial payments to lenders under a plan to buy 90 billion euros ($129 billion) of loans from them. Bank of Ireland Plc slid 11 percent.

Under the National Asset Management Agency, which will buy the loans to cleanse balance sheets, banks would receive about 80 percent of the loan value immediately, the Sunday Times reported in London yesterday, without citing anyone. The remaining 20 percent would be paid if the property that was bought with the loan achieved its forecast value on resale by the agency, the newspaper said.

The drop in U.S. futures indicated the S&P 500 may trim its sixth straight monthly advance, the longest stretch of gains since January 2007.

Baoshan, China Southern

The MSCI Asia Pacific Index slipped 0.7 percent. Baoshan Iron & Steel Co. dropped after the company reported a 93 percent plunge in first-half profit. The Asian gauge is valued at 108 times the earnings of its 970 companies, the highest level since 2002, Bloomberg data show.

China Southern Airlines Co., the nation’s biggest carrier, fell 7.9 percent. First-half net income at the Guangzhou-based carrier tumbled 97 percent as it failed to repeat year-earlier foreign-exchange gains. Industrial Bank Co. and Aluminum Corp. of China Ltd. tumbled 10 percent after Caijing magazine reported new loan growth this month may be almost half that of July.

The Shanghai Composite has slumped 23 percent to 2,667.75 since Aug. 4, more than the 20 percent drop that is the common definition of a bear market. China’s gauge is the worst performer this month among 89 benchmark indexes tracked by Bloomberg globally.

‘Bubble Territory’

China’s economy isn’t “sustainable” and the Shanghai Composite “should be 2,000 or less,” former Morgan Stanley Asian economist Andy Xie said in a Bloomberg Television interview. He added that China’s market remains “in bubble territory.”

Japan’s Nikkei 225 Stock Average fell 0.4 percent, reversing an earlier gain of 2.2 percent. The yen appreciated to 132.93 per euro, from 133.85 in New York on Aug. 28, and strengthened to 93.02 per dollar from 93.60.

“Some are saying the market has fully reflected the change of government, but the change is too big to be priced in,” said Hisakazu Amano, who helps oversee the equivalent of $18 billion at T&D Asset Management Co. in Tokyo. “The impact of the DPJ victory on company earnings is still uncertain and investors can’t decide what to buy or sell.”

The DPJ routed the Liberal Democratic Party in yesterday’s vote, capturing 308 of 480 lower-house seats. The DPJ has pledged to revive the economy, which is emerging from its deepest recession since World War II, by boosting child-care spending, cutting taxes and limiting the power of bureaucrats.

Honda, Canon

The stronger yen weighed on exporters. Honda Motor Co., which gets more than half its sales in North America, slid 1.8 percent. Canon Inc., the world’s biggest maker of digital cameras, which gets a third of its sales from the Americas, lost 3.3 percent.

Treasuries rose, heading for their first two-month gain this year, as investors added to bets the global financial crisis will slow the pace of inflation.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, narrowed for a sixth day, reaching 1.68 percentage points, from this month’s high of 2.05 points on Aug. 10. The spread has averaged 2.20 percentage points for the past five years.

The yield on the 10-year note fell two basis points to 3.43 percent, according to BGCantor Market Data.

European consumer prices dropped in August as the economy recovered from the deepest slump in six decades. Prices in the 16-member euro region fell 0.2 percent from the year-earlier month after declining a record 0.7 percent in July, the European Union statistics office in Luxembourg said. Economists predicted a 0.3 percent decrease, according to the median of 36 estimates in a Bloomberg News survey.

To contact the reporter on this story: Adria Cimino in Paris at [e-mail]; Daniel Hauck in London at [e-mail].

Last Updated: August 31, 2009 07:24 EDT