August 2009

By Lynn Thomasson and Adria Cimino Aug. 31 (Bloomberg) — Stocks retreated from Shanghai to New York 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 1 percent at 9:35 a.m. in New York, trimming its fifth monthly advance since the end of February. The Standard & Poor’s 500 Index fell 0.9 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. “There was more breadth to the global downturn than we’ve ever seen so it’s going to be very difficult to re-start the broader global economy,” said Stephen Roach , chairman of Morgan Stanley Asia Ltd., in an interview on Bloomberg Television. “It’s too early to put all this behind us.” 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. 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. Trading in London was closed for a holiday. Allied Irish Banks Plc fell 7.9 percent in Dublin 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 13 percent. The S&P 500 was poised to trim its sixth straight monthly advance, the longest stretch of gains since January 2007. “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. Baker Hughes Baker Hughes Inc., the world’s third-largest oilfield services provider, slid 5.9 percent in New York. The company agreed to buy BJ Services Co. for $5.5 billion to add to its natural-gas and deepwater businesses. BJ Services surged 10 percent. The MSCI Asia Pacific Index slipped 0.9 percent. Baoshan Iron & Steel Co. dropped 7 percent 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. ‘Bubble Territory’ 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. 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 against all 16 major trading partners tracked by Bloomberg. “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.” Japan’s Election 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. 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. To contact the reporters on this story: Adria Cimino in Paris at acimino1@bloomberg.net ; Lynn Thomasson in New York at lthomasson@bloomberg.net ..