Stocks in Europe, U.S. Futures Retreat; Aussie, TIPS Increase

June 3 (Bloomberg) – Stocks fell on speculation the rally that sent the MSCI World Index to a five-year high compared with earnings has outpaced the prospects for corporate profits. Russia led the decline.
The MSCI World gauge of 23 developed countries fell for the first time in five days, dropping 0.5 percent at 12:24 p.m. in London. Futures on the Standard & Poor’s 500 Index slipped 0.6 percent, indicating the measure will retreat from a seven-month high, while Russia’s Micex Index slid 4.2 percent. U.S. government bonds that protect investors against inflation showed increased concern that consumer prices will accelerate.
“Markets have run hard, valuations have risen sharply,” Andrew Howell, an emerging-markets strategist at Citigroup Inc. in New York, wrote in a research note. “We do not see major evidence of a pent-up demand for Russian equities among global investors from here.”
Efforts by governments and central banks to end the first global recession since World War II helped push the valuation on the MSCI World index to 18.2 times the average earnings of its 1,655 companies, the most expensive since 2004. The index’s three-month, 45 percent rebound is stoking investor concerns because U.S. profits will decline until the last quarter of this year, according to analyst estimates compiled by Bloomberg.
Australian Dollar
A report today that showed Australia’s economy unexpectedly expanded 0.4 percent in the first quarter was the latest sign that interest rate-cuts and stimulus spending may be fueling a recovery. The MSCI Asia Pacific Index climbed 0.6 percent and the Australian dollar strengthened 0.3 percent versus the yen.
The euro fell 0.5 percent against the dollar as reports showed European consumer spending and exports contracted the most in at least 14 years in the first quarter and investment slumped. Gross domestic product shrank 2.5 percent from the fourth quarter, matching an initial estimate and the most since the data were first compiled in 1995, the European Union’s statistics office in Luxembourg said today.
The U.S. dollar also strengthened 1.4 percent against the New Zealand dollar and 0.9 percent versus the South African rand as the retreat in stocks spurred investors to seek refuge in the greenback.
The ECB will probably hold its main interest rate at a record low of 1 percent tomorrow, according to economists surveyed by Bloomberg News, as it sets out the mechanisms for buying 60 billion euros ($86 billion) of covered bonds, low-risk securities backed by mortgages and public sector loans. ECB council member Ewald Nowotny said in a letter last week that the bank could expand the asset-purchase program beyond that, buying bonds or commercial paper.
Lehman’s Collapse
Some markets are returning to levels before the failure of Lehman Brothers Holdings Inc. in September froze credit. Corporate bonds in euros rallied to the highest since the New York-based firm collapsed in the biggest bankruptcy in history. The pound climbed to more than $1.66 for the first time in seven months as U.K. consumer confidence improved.
NYSE Euronext Chief Executive Officer Duncan Niederauer said today he’s “a lot more confident” the three-month rally in equities is sustainable as trading volume increases.
“At the end of March I was apprehensive because I thought the market had gone up so much so quickly that it didn’t feel like a fundamentally driven rally to me,” Niederauer said in an interview in Amsterdam. “I was nervous that the fundamentals hadn’t really changed and we hadn’t seen enough volume.”
Treasuries, TIPS
Treasuries rose today, with the yield on the 10-year note falling almost four basis points to 3.58 percent, according to BGCantor market data. The 10-year breakeven rate, the extra yield investors demand to hold notes instead of Treasury Inflation Protected Securities, or TIPS, rose to 2 percent for the second day, the highest level since September.
The collapse of bonds tied to subprime mortgages froze credit markets starting in August 2007 as banks hoarded cash, triggering the global recession and losses at financial firms that have reached almost $1.5 trillion.
Credit markets unlocked as the U.S. Treasury said it would finance as much as $1 trillion in purchases of distressed assets, the Federal Reserve pledged to buy more than $1 trillion of bonds and the Federal Deposit Insurance Corp. agreed to guarantee corporate debt.
The Libor-OIS spread, which measures banks’ reluctance to lend, narrowed to 44 basis points, or 0.44 percentage point on June 1, the lowest level in almost 16 months, from a record 364 basis points in October following Lehman’s failure.
U.S. Job Reports
U.S. reports this week may show unemployment is still increasing. ADP Employer Services probably will say companies cut an estimated 525,000 jobs in May following 491,000 in April, according to 28 economists surveyed by Bloomberg.
Labor Department data on June 5 may show that the unemployment rate climbed to 9.2 percent in May, the highest level since September 1983, according to the median of 73 estimates in a Bloomberg News survey.
Russian stocks dropped the most in nine days after Citigroup’s Howell downgraded the shares to “underweight” from “overweight,” citing a “huge run” since March that made valuations less attractive. The Micex trades at 7.2 times reported profits, almost double the price-to-earnings ratio of three months ago, according to data compiled by Bloomberg.
‘Like the 1970s’
U.S. futures slid, indicating the S&P 500 may drop for the first time in five days, after Credit Suisse Group AG cut the firm’s allocation on U.S. stocks to its 60 percent benchmark level from “overweight.” The bank maintained a year-end estimate of 920 for the S&P 500, which closed yesterday at 944.74.
“We remain concerned about the economic backdrop,” London-based global equity strategist Andrew Garthwaite wrote in a note today. “We believe we are in a range trading market like the 1970s.”
Higher bond yields have “undermined” the valuation of equities, Garthwaite said. Bond investors have driven up the yield on the benchmark 10-year Treasury note, which helps set rates on everything from mortgages to corporate bonds, to as high as 3.75 percent last week from the record low of 2.035 percent in December.