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Fears Over Spain Banks, Korea Slam Futures

CNBC.com
Tuesday, 25 May 2010 | 7:05 AM ET

Stock index futures pointed to a sharp decline Tuesday, while European and Asian shares dived as well, amid ongoing sovereign debt concerns and new worries about tensions between North and South Korea.

The Dow Jones Industrial Average last closed below 10,000 on Feb. 10 but futures indicated the bluechips would open well below that psychological benchmark when trading begins.

US banks were likely to take the biggest hit. The SPDR Financial exchange-traded fund was off 3 percent in premarket trading, mirroring Monday's drop of 2.9 percent in the Standard & Poor's 500 financial sector.

Global markets were all showing significant declines. European markets all were done more than 2.5 percent and some Asian indexes looked even worse.

Futures briefly pared losses but turned back lower after a report showed housing prices fell in March despite hopes that the government tax credit would help lift the market.

North Korea threatened military action if South Korea continued to violate waters on the west coast of the penisnsula. The Hang Seng in Hong Kong closed 3.4 percent lower on Monday, while the Nikkei plunged 3.1 percent and the Shanghai Composite lost 1.9 percent.

"There's a lot to pay attention to and there's no shortage of calamaties going on," Rick Szpila, a trader with JPMorgan Futures, told CNBC. "Just pick a continent, really, and something's happening."

The selloff benefitted U.S. and other assets seen as a safe haven from the turmoil spreading across Europe. German Bund futures hit a record high at 129.18, while yields on the 10-Year Bunds hit a record low.

The Greece/10-year bund spread grew to 5.30 percentage points.

Credit markets stiffened, with the three-month Libor rate, which is what banks charge each other for overnight lending, widening to 0.5363 percent, up 0.0266 from Monday. The rate is still low by historical standards but has doubled since January and is at its highest level since June 2009.

The US dollar jumped another 1.3 percent against a basket of foreign currencies while the euro again weakened.

US Treasurys again were reaping the benefit. The benchmark 10-year note was up nearly a full point in price earlier before fading, its yield drifting toward 3 percent. The 30-year bond gained more than a full point and brieflly yielded below 4 percent for the first time since Oct. 7, 2009.

Commodity prices also were broadly lower. Crude oil tumbled more than $2 a barrel in morning trade to fall below $68, while gold also lost a bit of ground.

Three Spanish banks agreed to merge some operations after the Bank of Spain seized troubled Spanish bank CajaSur with a 500 million euro move to keep it solvent. The move pushed the euro lower and left investors concerned about the country’s fiscal health.

On the economic calendar, May consumer confidence will be announced at 10:00 am New York time, with economists predicting that the index rose to 58.3, up from April’s 57.9.

The Treasury will auction $42 billion in 2-year notes later, with the results available shortly after 1 pm New York time. Wednesday will see an auction of $40 billion in 5-year notes, and there will be a $31 billion auction of 7-year notes on Thursday.

Treasury Secretary Tim Geithner is in China for high-level talks this week, telling CNBC that China is committed to pushing currency reforms and strengthening domestic demand.

In other news, Wal-Mart cut the price of the Apple iPhone 3GS in half, which many see as an indication that Apple is about to unveil a new iPhone model.

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