U.S. Stocks Resume Decline as Greek Concern Outweighs Economy

May 5 (Bloomberg) — U.S. stocks retreated after erasing an earlier loss, as concern that European government debt levels will derail the global recovery overshadowed growth in U.S. service industries and jobs.

The Standard & Poor’s 500 Index slid 0.2 percent to 1,171.15 as of 1:34 p.m. in New York, resuming a decline after Nouriel Roubini said the U.S. economy will weaken in the second half of the year. ConocoPhillips slipped after oil dropped to below $81 a barrel. News Corp. fell after the owner of the Twentieth Century Fox film studio forecast a decline in profit. JPMorgan Chase & Co. led bank stocks higher.

“The credit fears are dominating the market,” said Mark Bronzo, an Irvington, New York-based fund manager at Security Global Investors, which oversees $21 billion. “There’s still concern about Greece and whether the package will be sufficient and avoid spreading to Portugal and Spain.”

The Dow Jones Industrial Average slid 22.60 points, or 0.2 percent, to 10,904.17. The Stoxx Europe 600 lost 1 percent to 250.55 at the European close and the MSCI World Index decreased 0.9 percent to 1,160.91, erasing its 2010 advance.

U.S. equities rebounded from their lows of the day after a report showed service industries expanded. The Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, held at an almost four-year high of 55.4 for a second month. An earlier report from ADP Employer Services showed private employers added 32,000 jobs in April, a third straight month of gains.

‘Confirms the Recovery’

“While below estimates,” the ISM number “is above the long term average and confirms the recovery, but is backward- looking now in the midst of Europe and China concerns,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, in an e-mailed note.

Roubini, the New York University professor who forecast the U.S. recession more than a year before it began, said at the Bloomberg Markets Hedge Fund Summit that the U.S. unemployment rate will end the year at 9.7 percent, where it was in March.

U.S. stocks tumbled yesterday amid speculation Europe’s government debt crisis will spread beyond Greece. The euro fell below $1.30 for the first time in more than a year yesterday and European equities wiped out all of their gains for 2010. Greece’s fiscal crisis is threatening “grave contagion effects” in the euro area, said European Central Bank council member Axel Weber in a statement today.

Portugal

Portugal may have its credit rating cut by Moody’s Investors Service for the first time as the country struggles to reduce its budget deficit. The country’s shortfall, 9.4 percent of gross domestic product, was the fourth-largest in the euro region last year and S&P cut its rating on the nation last week.

ConocoPhillips, Hess Corp. and Occidental Petroleum Corp. fell more than 0.8 percent as crude oil traded near $80 a barrel in New York as the euro dropped against the dollar on concern that Greece’s bailout may have to be extended to other nations.

News Corp. declined 6 percent to $14.47. The company controlled by billionaire Rupert Murdoch said fourth-quarter earnings will decline as costs for new releases reduce film operating income.

Intel Corp. retreated 1.5 percent to $22.07. The world’s largest chipmaker was cut to “hold” from “buy” at ThinkEquity LLC.

Benchmark indexes rose earlier today, with the S&P 500 gaining as much as 0.2 percent.

Reconciling Mixed News

“The capital markets are trying to reconcile the mixed news,” said Keith Wirtz, who oversees $18 billion as chief investment officer at Fifth Third Asset Management Inc. in Cincinnati. “We’re getting good figures in the U.S., despite the concern with European credit. The ISM this morning just adds to the perception that the economic recovery and earnings growth will power this market. However, Europe is going to dominate the news flow for a while.”

XL Capital Ltd. jumped 6.4 percent to $18.27. The Bermuda- based insurer reported first-quarter profit that increased more than analysts estimated on improved investment results. XL has shifted its investment portfolio to lower-yielding holdings to reduce risk after it was hobbled by assets tied to subprime mortgages in 2008.

Intercontinental Exchange Inc. gained 4.8 percent to $118.85. The second-largest U.S. futures market said first- quarter profit rose 40 percent on record volume led by energy contracts such as for Brent crude oil and natural gas.

The declines over the last two days have trimmed the S&P 500’s advance this year to 5 percent. The index is still up 73 percent from a 12-year low in March 2009.

Risk ‘Similar to 2006’

Investors’ risk perception is not reaistic given the current economic issues that could weigh on the global recovery, Maverick Capital Ltd.’s Lee Ainslie said.

“Longer term, virtually any measure of risk, the VIX, CDS levels, bond spreads reflect a level of risk very similar to 2006,” Ainslie said at the Bloomberg Markets Global Hedge Fund & Investor Summit in New York. “That’s not reality if you think about the euro, the financial reform, the U.S. consumer.”

The benchmark of volatility on short-dated options — the Chicago Board Options Exchange Volatility Index, or VIX — fell in mid-April to where it was before the global credit crisis, indicating that investors weren’t expecting any shocks for equities. At the same time, mounting U.S. debt and questions as to what the removal of government stimulus measures might mean for the recovery indicate that risks to the financial system remain.

The VIX climbed 4.2 percent to 24.85.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net ; Lynn Thomasson in New York at lthomasson@bloomberg.net .

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Greenland Oil Rush Looms as Exxon Eyes Cairn’s Bet

May 5 (Bloomberg) — Cairn Energy Plc is betting $400 million this year on striking oil off Greenland, a campaign that will be closely watched by producers such as Exxon Mobil Corp. and Chevron Corp. that hold rights off the island.

The potential rewards may justify the cost of Arctic drilling: Greenland’s waters could hold 50 billion barrels of crude and gas, the U.S. Geological Survey estimates, enough to meet Europe’s energy demand for almost two years. More companies are on the way. Royal Dutch Shell Plc and Statoil ASA were among bidders in this week’s auction of offshore drilling rights.

After six failed attempts by explorers in Greenland over the past 30 years the rush is on as global warming eases Arctic exploration and because of dwindling resources in areas such as the North Sea. For Greenland’s 56,000 inhabitants, largely dependent on shrimp exports, petroleum may also bring wealth and allow more independence from Denmark, which has held sway over the world’s largest island since 1721.

“It’s an enormous acreage area and you’ve got to have stamina to see this through properly,” Simon Thomson, legal and commercial director at Cairn, which holds eight Greenland licenses, said in an interview. “Obviously we’re hoping for success, but the blocks are 10,000 square kilometers each.”

‘Serious Threats’

The far north’s potential is spurring exploration from Russia to Alaska. The Arctic may hold 27 percent of the world’s undiscovered gas and 13 percent of the oil, the USGS said in 2008. Areas off Greenland, including some shared with Canada, may hold 17 billion barrels of oil, 148 trillion cubic feet of gas and 9.3 billion barrels of gas liquids, the USGS said.

Highlighted by the unfolding disaster in the U.S. Gulf of Mexico from a BP Plc oil spill, exploring in untouched, environmentally fragile waters home to whales and walruses isn’t without risk. According to the WWF, development and transport are “already serious threats” to the Arctic and has met opposition and kept areas off limits from Alaska to Norway.

“Oil exploration in Greenland is very closely tied to independence, so there’s enormous local support,” said Truls Gullowsen, head of Greenpeace in Norway. “The area of the 2010 licensing round is very complicated, it’s very far up north, there’s lots of ice, lots of natural resources and very far away from any form of support should things go wrong.”

Fishing, Hunting

Greenland will in August announce the winners of 14 blocks in a 150,000-square-kilometer area in Baffin Bay, more than doubling its available acreage after holding regular rounds since 2002. The areas are north of the 67th parallel, where oil has been seen seeping out of rocks along the shoreline. The government has financed seismic surveys to attract explorers.

It has handed out 13 licenses since 2002 to Cairn, Exxon, Chevron, EnCana Corp., Husky Energy Inc., Dong Energy A/S, PA Resources AB and Nunaoil A/S, the state-owned company. There was “fierce” competition in the latest round, Greenland’s Bureau of Minerals and Petroleum said in a statement on May 3.

“We’re a fishing and hunting economy, just like Norway used to be,” Oil Minister Ove Karl Berthelsen said by phone from Nuuk, drawing a comparison with the world’s sixth-biggest crude exporter. “We want our industry to stand on several legs and oil is very important. The next 20 years will be vital.”

Greenland gets about $600 million a year, or $10,700 a person, from Denmark. It was granted home rule in 1979 and increased local powers in 2009. The island’s $2 billion economy derives about half its exports from shrimp, according to Greenland’s statistics agency. With planned taxes and royalties, and the 12.5 percent stake held in each license by Nunaoil, the government will get about 59 percent of the revenue, according to Joern Skov Nielsen, head of the petroleum agency.

Oil Seeps

In November, seven companies including Chevron, Exxon and Dong Energy A/S formed the Greenland Oil Industry Association, to share data and hold talks with the local government on environmental and safety issues.

For companies like Norwegian Energy Co., the licensing round this year and in 2012 may be the right time to get a share of the potential windfall, Chief Executive Officer Scott Kerr said in an interview.

“A small company like us we need to go in now, because if someone goes in and a discovery is made, we immediately get priced out of the market If Cairn has success, there are going to be a lot of people looking at Greenland,” he said.

Statoil Returns

Spokespeople at Statoil, Shell, Norwegian Energy and Cairn confirmed they applied for licenses in this year’s round. Of companies with current licenses, Exxon, PA Resources and EnCana decided not to bid, according to spokespeople. “We’re still considering other Greenland opportunities,” said Patrick McGinn, an Exxon spokesman.

Spokespeople at Chevron, Dong, BP, Total SA and Tullow Oil Plc all declined to comment. Heritage Oil Plc didn’t bid, according to a spokesman.

For Statoil it will be a comeback to Greenland after drilling a dry well off Nuuk in 2000, the first for any explorer since the late 1970s. “Arctic projects are very close to the capabilities of Statoil,” Helge Lund, chief executive of Norway’s largest oil company, said on April 26. “We are interested in Greenland and the prospects there.”

Cairn, based in Edinburgh, is preparing to drill as many as four wells off Disko Island, a whaling and hunting community where icebergs and humpback whales can be spotted offshore. The company expects to invest $1 billion over three years. Cairn acquired “a large amount of seismic data” in the past two years and plans four more wells next year, Thomson said. Cairn is assuming a 10 percent chance of success.

Investments Needed

As many as 20 wells may be drilled in the next 10 years with potential production in a decade, said Skov Nielsen. Exxon, Chevron and Dong must decide on drilling in their licenses off Disko over the next four years. The costs per well is about $100 million and eventual production facilities may need investments of $5 billion to $6 billion, he said.

“The first discovery has to be at least 250-300 million barrels but any subsequent discoveries could be smaller because then you have the infrastructure,” he said.

Companies drilling in the area will be able to build upon experience from other Arctic exploration, said Cairn’s Thomson. Still, icebergs, water depths that reach 1,500 meters toward the sea border with Canada, and months of darkness are challenges, said Hans Kristian Olsen, chief executive at Nunaoil.

The island will also need to build up the industry, said Olsen. “We are starting from scratch in terms of developing an exploration and production industry.”

Stocks, Euro Tumble on Debt Concern; S&P 500 Losses Limited

May 5 (Bloomberg) — The MSCI World Index of stocks erased its 2010 gain, the euro slid to a 14-month low and Treasuries gained on concern Europe’s debt crisis is worsening. Losses in U.S. equities were limited as data showed growth in jobs and service industries.

The MSCI gauge of equities in 23 developed nations declined 0.8 percent at 1:30 p.m. in New York, leaving it down 0.6 percent for the year. The Standard & Poor’s 500 Index fell 0.2 percent to the lowest since March after sliding as much as 1.3 percent. Spain’s IBEX 35 Index slumped 2.3 percent to an almost 10-month low. The euro sank below $1.29. Nickel sank 9.6 percent and oil dipped below $80 a barrel. The 10-year Treasury yield fell 3 basis points to 3.56 percent and Germany’s 2-year yields touched a record low 0.56 percent on demand for safe assets.

European Central Bank council member Axel Weber said today there is a threat of “grave contagion effects,” while Moody’s Investors Service warned it may cut Portugal’s debt rating and three people were killed in an Athens fire set during protests against Greek austerity measures. U.S. stocks briefly erased losses before returning lower as Nouriel Roubini, the economist who forecast the recession, said the American economy will weaken in the second half of the year.

“The reason we have to worry is, let’s face it, this is a global environment,” said Jason Pride, director of investment strategy at Glenmede in Philadelphia, which manages $18 billion. “The primary concern is the contagion risk associated with Greece and some of the other problematic nations in Europe and the follow-on effects on long-term economic growth. We may be in for more of a rough and volatile period.”

Plunge Extended

The S&P 500 added to losses from yesterday’s 2.4 percent rout, its biggest since February, as concern about contagion from Europe’s debt crisis overshadows growing evidence the U.S. economic recovery is being sustained. The Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, held at an almost four-year high of 55.4 for a second month. A report from ADP Employer Services showed private employers added 32,000 jobs in April, a third straight month of gains.

Boeing Co. and Intel Corp. slid 1.9 percent to lead declines in the Dow Jones Industrial Average, while Travelers Cos. and Wal-Mart Stores Inc. rose more than 1.4 percent for the biggest gains.

VIX Climbs

The benchmark index for U.S. stock options rose a second day to reach the highest intraday level in three months. The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed 3.7 percent to 24.71. The index, which measures the cost of using options as insurance against declines in the S&P 500, is down from a record 80.86 in November yet above its 20 average over its 19-year history.

The euro declined as much as 1.4 percent against the dollar to $1.2804, its weakest level since March 2009, before paring losses to trade at $1.2886. The euro fell 0.7 percent versus the pound. Britain’s currency advanced against 13 of 16 of its most- traded peers as the U.K. entered its last day of campaigning before tomorrow’s election.

Traders are betting a Greece’s European Union-led bailout will fail to ease concern other indebted countries will need rescue packages. Investors demanded an extra 131 basis points to hold Spanish 10-year bonds instead of German bunds today, the most since the euro’s inception and up from 116 basis points yesterday. The difference for Portuguese bonds jumped to 294 basis points from 252 basis points.

Portugal Ratings

Portugal may have its Aa2 credit rating cut by Moody’s Investors Service as the country struggles to reduce its budget deficit and revive economic growth, the latest sign that contagion from the Greek crisis is spreading. Global stocks plunged last week as S&P cut ratings on Greece, Portugal and Spain.

Greek 10-year yields climbed to 719 basis points above German debt, a record in Bloomberg data going back to 1998.

Greek demonstrations against government austerity measures turned deadly when three people were killed after protesters set fire to a bank in central Athens in what Prime Minister George Papandreou called a “murderous act.” Greece’s federation of banking unions called a 24-hour strike for tomorrow.

Germany’s parliamentary budget committee approved aid for Greece today at a session in Berlin, Free Democrat lawmaker Otto Fricke said in an interview.

Default Swaps

The cost of insuring European bank debt from default rose to the highest in a year with the Markit iTraxx Financial index of credit-default swaps jumping as much as 19 basis points to 154. Swaps contracts Portugal surged 85.5 basis points to a record 429.5, according to CMA DataVision prices, and contracts on Greece, Italy and Ireland surged.

The Stoxx Europe 600 Index lost 1 percent as 15 stocks fell for every one that rose. Banco Santander SA, Spain’s biggest lender, slid 2.5 percent. Petroplus Holdings AG retreated 4.8 percent in Zurich after reporting a loss. Declines were limited as BP Plc advanced for the first time in four days, climbing 2.9 percent in London as JPMorgan Cazenove said the sell-off following the oil spill in the Gulf of Mexico was overdone.

The MSCI Asia Pacific excluding Japan Index dropped 1.9 percent. Esprit Holdings Ltd., a Hong Kong-based clothier that gets about 85 percent of its revenue in Europe, sank 5.2 percent. Australia’s Westpac Banking Corp. lost 4.2 percent in Sydney even after reporting a surge in first-half profit.

Emerging European equity markets declined, with benchmark indexes in Romania, Poland and the Czech Republic losing at least 1.7 percent. In Asia, the Philippine Stock Index tumbled 3.5 percent as faulty vote-counting machines raised concern there will be a delay in choosing a replacement for President Gloria Arroyo.

Commodities Slide

Commodities fell for a second day, led by a slump in oil and copper, on concern the Greek debt crisis will spread and undermine Europe’s economic recovery.

The Reuters/Jefferies CRB Index of 19 raw materials declined as much as 1.9 percent, extending yesterday’s 2.3 percent retreat. Crude oil fell as much as 4.3 percent, copper 5.4 percent and nickel 16 percent.

The CRB’s 4.2 percent retreat is the biggest two-day drop in three months and comes amid growing expectations that Greece’s 110 billion-euro ($143 billion) rescue package will need to be repeated in Spain and Portugal. European Central Bank council member Axel Weber said today there is a threat of “grave contagion effects” in the euro area. Moody’s Investors Service said it may cut its rating on Portugal.

To contact the reporter on this story: David Merritt in London on dmerritt1@bloomberg.net

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