World Stocks Fall on Waning Optimism over Europe Bailout

The euro halted a two-day gain and stocks fell, with Chinese equities entering a bear market, amid concern Europe’s indebted nations will struggle to cut deficits even after an almost $1 trillion emergency loan package., Bloomberg 5/11/2010 10:28:58 AM

The Stoxx Europe 600 Index fell 1.6 percent after rising 7.2 percent yesterday, its biggest gain since November 2008. The Standard & Poor’s 500 Index dropped 0.6 percent. Copper, zinc, aluminum and led fell more than 1.5 percent to lead commodities lower.

The S&P 500 erased less than one-eighth of yesterday’s 4.4 percent rally, which was the biggest advance since March 2009. The benchmark gauge for U.S. equities is down 5.3 percent from its 2010 high on April 23. Alcoa Inc., Merck & Co. and Intel Corp. lost more than 1.3 percent to lead declines in the Dow Jones Industrial Average after the 30-stock measure rallied 405 points yesterday.

Traders are betting the plan to rescue debt-laden governments from Greece to Portugal will fail to reverse the euro’s worst start to a year since 2000, forcing the European Central Bank to keep interest rates at a record low for longer. The euro has lost more than 11 percent versus the dollar so far in 2010.

Credit default swaps on Greece dropped 19.5 basis points to 565, after tumbling 329.5 basis points yesterday, the biggest decline since March 2005, according to CMA DataVision. The swaps are still up from 364 on April 12. The yield on the two-year Greek note fell 65 basis points to 6.89 percent, extending yesterday’s more than 1,000 basis-point decline.

The rate banks pay for three-month dollar loans held near the highest level in about nine months as Europe’s loan plan failed to encourage institutions to lend more to each other.

The MSCI Asia Pacific Index fell 1.1 percent, paring yesterday’s 1.5 percent advance. The MSCI Emerging Markets Index slipped 0.7 percent as the retreat in Chinese shares was offset by gains of at least 2.6 percent in Russian and Philippine equity markets, which were closed for trading yesterday.