Shares fall for first time in five days

Stocks in Europe dropped for the first time in five days after European Central Bank president Jean-Claude Trichet said the debt crisis threatens the financial system.

The Stoxx Europe 600 Index slid 0.7 per cent at 1.10pm, and Standard and Poor's 500 Index futures fell 0.6 per cent, after the US stocks gauge jumped the most since August yesterday.

The yield on the 10-year US Treasury note climbed eight basis points and the German 10-year bund yield slipped one basis point.

The crisis has reached a "systemic dimension", Mr Trichet said today, as Slovakia, the only country in the region that hasn't ratified the retooled bailout fund, prepared to vote on the package.

International inspectors said Greece has made progress toward closing its budget gap and is likely to receive its next tranche of rescue funds in early November.

"The markets would find any excuse to see a little bit of a setback," said Robert Buckland, head of global equity strategy at Citigroup Inc. in London. "The ECB wants the politicians to make the tough decisions and the stock market wants the tough decisions to made."

About two shares retreated for every one that advanced in the Stoxx 600. The index rallied 8.5 per cent in four days through yesterday, the most since November 2008.

The decline in S&P 500 futures followed the gauge's 3.4 per cent gain yesterday and an 8.7 per cent rebound since October 3rd.

S&P 500 earnings, excluding financial companies, are forecast to have increased 14 per cent for the third quarter, the smallest gain since the end of 2009, analysts' estimates compiled by Bloomberg show.

"You're getting more profit warnings because the economic news has been dire for several months now," said Ian Murrell, an analyst at Pritchard Stockbrokers Ltd. in London who correctly forecast last year's gain in UK stocks and gold's increase to a record this year. "The two main props to equity markets in recent years have been quantitative easing and decent corporate results. With the weaker economy that we're seeing, sooner or later that's going to impact corporate profits."

Greek 10-year bonds pared losses, with the 10-year yield up 40 basis points at 24.31 per cent after climbing as much as 76 basis points.

A European Union, International Monetary Fund and European Central Bank team of inspectors said Greece has overall made important progress in fiscal consolidation. The success of the program depends on continued private sector involvement, the statement said. Once the Eurogroup and the IMF's Executive Board have approved the conclusions of the fifth review, the next tranche of €8 billion will become available, most likely, in early November.

Luxembourg's prime minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said Greek bondholders may need to take a writedown of more than 60 per cent on the nation's debt.

His spokesman, Guy Schuller, later said he meant that haircuts could exceed the 21 per cent already agreed in July.

The yield on the two-year German note declined two basis point. The Italian two-year note yield rose one basis points even as borrowing costs fell and demand climbed at a sale of €9.5 billion of 74- and 367-day bills. Greece auctioned €1.3 billion of 186-day securities, while the Netherlands issued €2.7 billion of 2017 notes.

US three-year note yields climbed for a fifth day before an auction of $32 billion of the securities. The Treasury is scheduled to offer 10-year debt tomorrow and 30-year bonds in two days. Treasuries didn't trade yesterday because of a holiday.

The euro weakened 0.3 per cent to $1.3607. The single currency depreciated 0.3 per cent versus the yen. Sterling fell 0.2 per cent to $1.5639 after a report showed UK manufacturing slid more than economists forecast in August, adding to signs that the recovery continued to struggle in the third quarter.

Factory output fell 0.3 per cent from July, when it declined a revised 0.2 per cent, the Office for National Statistics said today in London. The median forecast of 24 economists in a Bloomberg News survey was for manufacturing to fall 0.2 per cent.

The MSCI Emerging Markets Index climbed 0.8 per cent, driving the benchmark index to its steepest five-day gain since 2009. The Hang Seng China Enterprise Index of Chinese companies traded in Hong Kong jumped 4.4 per cent after the Chinese state investment fund bought shares in four banks. The Taiex Index surged 2.6 per cent after a holiday in Taiwan yesterday, while South Korea's Kospi Index climbed 1.6 per cent to a three-week high.

Bloomberg