Stocks fall on US data, dollar gains vs. euro

NEW YORK: Stocks fell, Spain's borrowing costs climbed and the euro slipped yesterday as initial optimism about Madrid's debt-cutting plans gave way to anxiety over its troubled banks and faltering global growth.
A report showing business activity in the US Midwest contracted this month for the first time since September 2009 knocked US stocks lower while the dollar strengthened against the euro as investors shunned risk.
The MSCI index of world stocks was down 0.5 percent. Madrid's IBEX led the falls, down 1 percent as an early lift from Spain's new round of spending cuts collapsed.
"At some point that (Spanish) credibility issue is likely to come back," said Derek Halpenny, European head of FX research at Bank of Tokyo Mitsubishi in London. "This is the fifth package — so the history of previous packages is that they weren't enough and lacked credibility."
The Dow Jones Industrial Average was down 88.46 points, or 0.66 percent, at 13,397.51. The Standard & Poor's 500 Index was down 8.88 points, or 0.61 percent, at 1,438.27. The Nasdaq Composite Index was down 21.43 points, or 0.68 percent, at 3,115.17.
Despite yesterday's losses, the S&P has advanced around 5.5 percent over the past three months.
Spain will remain in focus, analysts said, while Moody's Investors Service is expected to finish a rating review which may cost Madrid its sovereign investment grade status.
Investors fretted the euro zone was failing to gain control over its debt crisis as Spain's borrowing costs rose back above 6 percent and France reported increased debt. The 10-year Spanish bond last yielded 5.975 percent after peaking at 6.079 percent.
The spending cuts announced by Spain had temporarily raised hopes the way was open for a bailout by the European Central Bank, which would buy Spain's debt in an effort to lower its crippling borrowing costs.
Euro zone inflation data added to upward pressure on the single currency as a surprise rise in Eurostat's flash September reading cast doubts over the near-term chances of another interest rate cut from the ECB.
France is also under the microscope and President Francois Hollande's fiscal credibility on the line. His first annual budget, France's toughest in 30 years, raised taxes to bring in 30 billion euros ($39 billion) to keep deficit-cutting promises.
France announced its public-sector debt rose almost 2 percent to 91 percent of GDP. Greece's battered economy showed little sign of recovery as the latest retail data showed sales plunged 9.1 percent year-on-year in July.
The single currency fell 0.4 percent to $1.2859 as risk aversion rose after the US data. The dollar gained 0.2 percent against the yen, while the euro fell 0.2 percent against the Japanese currency.
But despite its wobbling economy and the negative sentiment it conveys for risk assets elsewhere in the world, China's yuan hit an all-time high versus the dollar.
Alongside gains in the dollar, the benchmark 10-year US Treasury note was up 13/32, with the yield at 1.6095 percent.
"We had been seeing good data recently, but now we seem to be following the slowdown in China and Europe and we're seeing weakness," said Paul Nolte, managing director at Dearborn Partners in Chicago.
In commodity markets, gold surrendered gains yesterday as the dollar rallied on risk aversion but the metal stayed on track for its biggest quarterly gain in more than two years on the back of this month's central bank easing measures.
Oil markets were still firm with those investors more inclined to bet economic reforms in Spain will work even as tight gasoline supply in the United States helps to underpin the crude market.
Brent crude futures for November rose 0.6 percent to $112.65 per barrel. US crude rose 0.1 percent to $91.99.