By Daniel Hauck Aug. 7 (Bloomberg) -- Global stocks dropped for a third day, metals declined and oil fell before a government report that may show U.S. unemployment climbed to a 26-year high last month. The MSCI World Index of 23 developed nations slid 0.4 percent at 12:23 p.m. in London as Royal Bank of Scotland Group Plc forecast further bad loans and falling asset values. Futures on the Standard & Poor’s 500 Index slipped 0.3 percent. Copper fell for a second day on the London Metal Exchange, and oil retreated 0.7 percent in New York. The five-month, 53 percent rally in the MSCI World has driven price-earnings valuations to the most expensive level since 2003 even before a recovery from the first global recession since World War II is assured. The U.S. Commerce Department may report that unemployment in the world’s largest economy rose to 9.6 percent, according to the median of 82 estimates in a Bloomberg News survey. Chinese officials said they will scrutinize stock-market gains fueled in part by a record $1.1 trillion of loans in the first half. “The current economic cycle is vastly different from the typical post-World War II cycle,” John Osterweis, chief investment officer at Osterweis Capital Management in San Francisco, wrote in a research note. “The continued deleveraging of the consumer and financial sectors in the wake of the credit bubble is likely to mute the normal lift the economy gets from a rebound in housing and consumer spending.” Job Losses U.S. employers probably eliminated 325,000 jobs in July after trimming 467,000 the prior month, according to the median of estimates in a Bloomberg News survey. The unemployment rate may have risen to 9.6 percent from 9.5 percent. The S&P 500 trades at 18.5 times its companies’ earnings over the past 12 months, the most expensive since March 2005, according to weekly data compiled by Bloomberg. Today’s drop in U.S. futures was limited as American International Group Inc. rose 13 percent in pre-market New York trading. The insurer rescued by the U.S. government reported its first profit in seven quarters as investment losses narrowed. Europe’s Dow Jones Stoxx 600 Index declined 1 percent as RBS plummeted 12 percent. The U.K.’s biggest government-owned bank posted a first-half loss of 1.04 billion pounds ($1.7 billon) as it set aside 7.5 billion pounds to cover bad loans and impairments. Per-share earnings for Stoxx 600 companies slumped 37 percent in the second quarter, with eight of 10 industry groups posting declines, according to data compiled by Bloomberg. BHP Billiton Ltd., the world’s largest mining company, retreated 2.7 percent in London as metals declined. PSA Peugeot Citroen slid 7.9 percent after Europe’s second-largest carmaker had its debt rating lowered to junk by S&P, which cited the company’s deteriorating profitability. Shanghai Index Plunges The MSCI Asia Pacific Index fell 0.7 percent as lower profits at Konica Minolta Holdings Inc. and DBS Group Holdings Ltd. added to concern that the rally in stocks has outpaced earnings prospects. The Shanghai Composite Index slid 2.9 percent, driving the benchmark to its worst weekly loss since February. China Construction Bank Corp. said it will reduce new loans by about 70 percent to avert a surge in bad debt. Tudor Investment Corp., the $10.8 billion hedge-fund firm run by Paul Tudor Jones, said equity markets may decline later this year, creating buying opportunities. Slowing growth in China and the return of front-page stories on swine flu may be “further catalysts for global equity markets to pause in September,” the Greenwich, Connecticut-based firm said in an Aug. 3 client letter, a copy of which was obtained by Bloomberg News. Emerging Markets The MSCI Emerging Markets Index dropped 1.2 percent. The gauge is valued at 17.6 times the earnings of its 743 companies, the most expensive level since October 2007, weekly data compiled by Bloomberg show. Russia’s Micex index fell 1.7 percent as the country’s central bank cut its benchmark refinancing rate a quarter-point to 10.75 percent, aiming to revive lending the world’s biggest energy-exporting economy. The ruble depreciated 0.8 percent against the U.S. dollar. Copper declined in London and Shanghai on speculation gains have outpaced the recovery in global demand. The three-month delivery price of the metal used in electrical wiring and plumbing declined 0.8 percent to $5,980 a ton on the LME. Crude oil for September delivery fell 0.7 percent to $71.46 a barrel in electronic trading on the New York Mercantile Exchange as the drop in equity markets renewed concerns that the global recession will erode fuel demand. Bank of England The Bank of England said yesterday it will extend an unprecedented program of bond purchases designed to cut borrowing costs and boost growth, fueling speculation that policy makers around the world expect the global economy to take longer to recover than anticipated. The U.K. pound fell for a second day, dropping 0.4 percent versus the euro and 0.3 percent against the dollar. The yen advanced against 15 of the 16 most-traded currencies tracked by Bloomberg, adding 0.2 percent compared with the dollar. Treasuries rose before the jobs data, with the yield on the benchmark 10-year note slipping 1 basis point to 3.74 percent. The cost of protecting European bank bonds with credit- default swaps rose 2.5 basis points to 90, adding to the biggest weekly increase since March, according to JPMorgan Chase & Co. prices for the Markit iTraxx Financial index. To contact the reporters on this story: Daniel Hauck in London at dhauck1@bloomberg.net.

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