Equities fall after record drop in US home sales

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Equities on Wall Street and across Europe fell after a US home sales report disappointed even the most pessimistic forecasters, heightening ever-growing concern about the outlook for the world's largest economy. US Treasuries rallied.

Sales of existing houses in the US plummeted by a record 27 per cent in July. Purchases plunged to a 3.83 million annual pace, the lowest in a decade of record keeping and worse than the most pessimistic forecast of economists surveyed by Bloomberg News.

Figures from the National Association of Realtors showed today in Washington also showed that demand for single-family houses dropped to a 15-year low and the number of homes on the market grew.

"Sentiment continues to build for an even more negative economic outlook," Thomas Simons, money market economist at Jefferies & Co, told Reuters.

Adding to the gloom was Bill Gross, who runs the world's biggest mutual fund at Pacific Investment Management Co, said mortgage yields in the US could rise as much as 4 percentage points without government support.

"Ninety-five per cent of existing mortgage creation over the past 12 months were government guaranteed," Gross wrote in a monthly investment outlook Bloomberg reported. "The private market was nowhere to be found because they charged too much."

Gross wrote that a transition back to a private market would generate "enormous" costs in terms of yields, which could rise 300 basis points to 400 basis points, "crippling any hopes of a housing-led revival to the economy".

In late trading, the Dow Jones Industrial Average shed 1.03 per cent, the Standard & Poor's 500 Index declined 1.22 per cent and The Nasdaq Composite Index dropped 1.40 per cent.

Among the most active stocks on Wall Street were Alcoa, Boeing and Caterpillar.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street's 'fear gauge', rose 4.91 per cent to 26.92 in New York. The index measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index.

The Stoxx Europe 600 Index dropped 1.7 per cent to 249.45.

National benchmark indexes fell in all 18 western European markets except Iceland. The U.K.'s FTSE 100 declined 1.51 per cent, Germany's DAX lost 1.26 per cent and France's CAC 40 shed 1.75 per cent.

Among the most active stocks in Europe were Rio Tinto, CRH and Lafarge.

The U.K. faces a "real risk" of a second recession, Bank of England policy maker Martin Weale told the London-based Times in an interview. The central bank's latest economic forecasts, published on August 11, were "putting a significant chance on the economy contracting over a four-quarter period," Weale said, according to the newspaper.

Concern about the economic outlook drove investors to the relative safety of US Treasuries. The rally drove two-year note yields to another record low.

The difference between the two-year note yield and the Federal Reserve's target lending rate fell to the narrowest level since December 2008, when the central bank adopted a range of zero to 0.25 per cent, according to Bloomberg. The government's US$37 billion auction of two-year notes attracted a record low yield.

"Fear is driving the Treasury market right now to lower rates," Jay Mueller, who manages about US$3 billion of bonds at Wells Fargo & Co in Milwaukee, told Bloomberg. "This is the kind of thing that may reinforce the idea of a double-dip recession."

The yield on the 10-year note fell 9 basis points to 2.52 per cent at 1.39pm in New York, according to BGCantor Market Data.

The Dollar Index, which measures the greenback against a basket of six major currencies, declined 0.09 per cent to 83.05.

Japan's Ministry of Finance may consider unilateral yen-selling market interventions if speculators drive up the currency, Nikkei Business Daily reported on Tuesday.

The yen rose to a 15-year high against the US dollar and a nine-year peak versus the euro amid concern the global economy was slowing, testing Japanese authorities' resolve to halt the currency's climb.

Nikkei also said in its August 25 morning edition that the Bank of Japan was considering additional steps to loosen monetary policy. Depending on market conditions, the policy board may decide to take action sooner by convening an extraordinary meeting, according to the report.

Actions could include boosting its facility that provides three-month funding at a low 0.1 per cent to 30 trillion yen from the current 20 trillion yen. Extending the funding period to six months would be another option, Nikkei said.

The US dollar briefly pared losses against the yen after the Nikkei report. It was last down 1.1 per cent at 84.14 yen, not far from a session low of 83.61 yen, according to Reuters data.

"Going the quantitative easing route seems to be the preferred policy move from Japanese authorities should they decide to act," Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey, told Reuters.

The loss of key technical support led speculators to short the currency in the hope of forcing stop-loss sales against both the yen and the greenback.

"Some stops can be seen in the euro starting from a little above 107.00 yen. If those are hit, things could get a bit nasty," a trader for a major Japanese brokerage house told Reuters.

The euro fell as low as 107.21 yen on trading platform EBS, its lowest since November 2001. The euro last stood at 107.29 yen, 0.5 per cent weaker on the day.

Against the US dollar, the euro hit a six-week low of US$1.2620 on EBS.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 1.43 per cent to 262.23.

Oil fell for a fifth straight session. US refined products futures continued to slide, with RBOB petrol futures prices hitting a 2010 low as the US summer driving season neared its end.

US crude for October delivery fell US$1.05, or 1.44 per cent to US$72.05 a barrel by 1607 GMT.

Total US crude trading volume neared 400,000 lots at midday in New York, heavy compared to the 30-day average of more than 590,000 lots per session.

October Brent crude fell US$1.02 to US$72.60.

Gold rallied, breaking a two-day losing streak. Spot gold was at US$1,232.20 an ounce at 1520 GMT, up from US$1,223.40 late in New York on Monday.

US gold futures for December delivery rose to US$1,235.60.