Euro slumps on contagion fears; Dow drops 3 percent

By Walter Brandimarte

NEW YORK (BestGrowthStock) – The euro slumped below $1.20 for the first time in more than four years on Friday while U.S. stocks (Read more about the stock market today. ) sank over 3 percent on fears Hungary could become the next casualty in an escalating European debt crisis.

Disappointing growth in U.S. payrolls in May added to doubts about the sustainability of the economic recovery, driving investors to the traditional safe havens of U.S. and German government bonds.

The aversion to risk weighed heavily on commodities, with oil sinking more than 4 percent to below $72 a barrel.

Hungary, perceived as the weak link in Eastern Europe due to its high debt ratios, spooked investors again on Friday when a spokesman for the new prime minister said recent comments about a Greek-style debt crisis there were not exaggerated.

Stocks fell across the board to hit their lowest closing levels. The Dow closed below 10,000 points and the S&P 500 slid to its lowest level since early February.

“The market is reacting to disappointing jobs report and Europe. The story about Hungary facing budget pressures is just another in a line of worries coming out of Europe,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

European banks with exposure to Eastern Europe were hit hard, adding pressure to the pan-European FTSEurofirst 300 (.FTEU3: ) index of top shares, which closed lower after four consecutive sessions of gains.

The euro was down 1.52 percent at $1.1972, also pressured by comments by French Prime Minister Francois Fillon, who said he only saw “good news” in the parity between the European single currency and the dollar.

Fillon’s remarks were later clarified by a source, who said his reference to “parity” was about the general evolution of the exchange rate between the euro and the dollar.

BANK FEARS

Stocks extended losses after the European single currency pierced the psychological level of $1.20.

MSCI’s all-country world equity index (.MIWD00000PUS: ) fell 2.8 percent.

The Dow Jones industrial average (.DJI: ) finished down 324.06 points, or 3.16 percent, at 9,931.22, while the Standard & Poor’s 500 Index (.SPX: ) lost 37.95 points, or 3.44 percent, to 1,064.88. The Nasdaq Composite Index (.IXIC: ) slid 83.86 points, or 3.64 percent, to 2,219.17.

Financial stocks were among the worst performers, with both the KBW Banks index (.BKX: ) and S&P Financial sector (.GSPF: ) down around 4 percent.

In Europe, the FTSEurofirst 300 (.FTEU3: ) index of top shares closed down 1.86 percent at 998.60 points, led lower by banking stocks.

Shares of French bank Societe Generale (SOGN.PA: ) fell 7.6 percent concerns about the firm’s derivatives operations. A bank spokesman said there was nothing to be said about the matter.

Banks with exposure to eastern European countries also fell, with Raiffeisen International (RIBH.VI: ) and Erste Group Bank (ERST.VI: ) down 8.3 percent and 7.8 percent respectively.

Most stocks of banks with a significant exposure to Eastern Europe feature among Europe’s biggest losers so far in 2010, with Societe Generale down about 35 percent and Raiffeisen down 21 percent.

They have been underperforming the STOXX Europe 600 Banks (.SX7P: ), which is down 15.3 percent year-to-date.

Emerging market stocks were 1.2 percent lower according to a MSCI index (.MSCIEF: ).

JOBS FRUSTRATION

Investors were also disappointed by data showing U.S. nonfarm payrolls rose by 431,000 in May, far below a consensus estimate for 513,000 new jobs as private sector hiring slowed sharply.

Although payrolls last month grew at their fastest pace in 10 years, about 90 percent of the gains came from temporary hiring for the decennial U.S. Census. Private-sector hiring was hurt as businesses opted to increase hours rather than take on new workers.

“The market is bothered by the fact that you had a smaller headline gain in private payrolls, and very little of it was in the services sector,” said Cary Leahey, senior managing director at Decision Economics in New York.

The services sector is the largest segment of the U.S. economy.

Investors rushed into assets considered safer after the jobs data, pushing 10-year Treasury notes up 45/32 in price. Yields on the benchmark bond fell to 3.2023 percent from 3.37 percent on Thursday.

German Bund futures rallied to a record high in after-hours trading. The June contract jumped 113 ticks to 129.63.

The aversion to risk also drove currency trade, with investors buying currencies perceived as safe-havens, such as the yen and Swiss franc.

“The euro was already getting hammered on worries about Hungary and with the nonfarm payrolls not living up to expectations, the risk trade is under assault from every angle,” said Boris Schlossberg, director of currency research at GFT Forex, in New York.

Against the Japanese yen, the dollar was 0.87 percent lower at 91.84 yen, after hitting a session low of 91.69 yen according to Reuters data.

The yen also rose against the euro and the Australian and New Zealand dollars.

Spot gold rose 0.97 percent to $1,219.30 an ounce, after touching a session low of $1,196.65 an ounce.

Assets seen as higher risk fell. Copper fell to near a five-month low, and U.S. crude oil futures fell 4.15 percent, to $71.51 per barrel.

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(Additional reporting by Caroline Valetkevitch; Editing by Leslie Adler)

Euro slumps on contagion fears; Dow drops 3 percent