U.S. Equity Futures Advance as Leaders Seeks Ways to Halt European Crisis

By Rita Nazareth - Sep 26, 2011 10:24 AM GMT+0700

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Sept. 26 (Bloomberg) -- Eswar Prasad, a professor at Cornell University and a former head of the International Monetary Fund’s financial studies division, talks about the outlook for the global economy. Euro-area countries will do whatever is necessary to end the crisis and ensure the financial stability of the entire euro area and its members, the IMF said in a statement after its meetings in Washington on Sept. 24. Prasad speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

U.S. stock futures pared an early advance, following the biggest weekly drop since October 2008 for the Dow Jones Industrial Average, on speculation European policy makers will announce steps to contain the debt crisis as foreign counterparts lobby for action.

Standard & Poor’s 500 Index futures expiring in December advanced 0.6 percent to 1,137 at 12:17 p.m. Tokyo time after falling as much as 0.7 percent and climbing as much as 1.3 percent. Dow futures gained 62 points, or 0.6 percent, to 10,759. December contracts on London’s FTSE 100 Index rose 0.5 percent.

U.S. Treasury Secretary Timothy F. Geithner warned at the annual meeting of the International Monetary Fund in Washington that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

“It’s not a surprise that we didn’t see anything concrete out of Europe this weekend,” Jack Ablin, who helps oversee $55 billion as chief investment officer for Chicago-based Harris Private Bank, said in a telephone interview. “The market is already pricing in a Greek default. If we don’t see any chips falling, investors will be pleased. This market is starting to get cheap.”

U.S. stocks fell last week as the Federal Reserve said risks to the economy have increased and concern grew that policy makers will fail to spur growth. Equities rebounded on Sept. 23, following a four-day rout that drove the S&P 500 down 7.1 percent, amid speculation European governments will act to prevent a financial crisis.

Alcoa, FedEx

For the week, Alcoa Inc. and DuPont Co. tumbled more than 14 percent to lead losses in the Dow. Materials companies in the S&P 500 slipped 12 percent for the biggest drop among 10 industries as every group declined at least 1.6 percent. Bank of America Corp. slumped 13 percent, while FedEx Corp. tumbled 12 percent after cutting its profit forecast.

The Morgan Stanley Cyclical Index of companies most-tied to economic growth lost 11 percent last week as all 30 of its stocks retreated. The Dow Jones Transportation Average, also considered a proxy for the economy, slumped 9.6 percent. Both gauges fell the most since March 2009.

“When you look at Europe, the solutions are not going to be implemented any time soon,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview. “That means the market volatility is going to continue.”

‘Firewall’

Geithner said over the weekend that governments must unite with the European Central Bank to “create a firewall against further contagion” and defuse the “most serious risk now confronting the world economy.” European policy makers are under pressure to further boost the ammunition of their regional rescue fund even as parliaments focus on ratifying a July plan to broaden its powers.

Last week’s rout erased $1 trillion from U.S. equities amid concern Greek insolvency is inevitable and Europe can’t contain the damage. The S&P 500 slumped 17 percent between April 29 and Sept. 23. The index’s gain since March 2009, when the last bear market ended, has been cut to 68 percent. The benchmark gauge for American common equity is trading at 12.4 times earnings in the past 12 months, 4.4 percent below its average valuation at the lowest point during the last nine bear markets, according to data compiled by Bloomberg.

‘Scapegoat’

Greek Finance Minister Evangelos Venizelos said his country will do “whatever it takes” to meet its budget goals and cautioned against making it a “scapegoat” for the global economy. Greece has yet to secure a second international bailout amid questions about whether it can satisfy the terms for aid. Economists at Citigroup Inc. say they expect the country to begin restructuring its debt as soon as December.

Stocks are having the worst quarter on record relative to U.S. Treasuries and gold, which may force investors to buy equities to rebalance their allocations, JPMorgan Chase & Co.’s Marko Kolanovic said. U.S. and emerging-market equities have returned 43 percentage points less, the most during a quarter since at least 2002, according to data compiled by Kolanovic, whose analysis is based on a model portfolio composed of stocks, bonds and gold.

“This underperformance may trigger significant quarterly rebalance flows into equities and out of Treasuries at the end of next week,” Kolanovic, the New York-based global head of equity derivatives strategy at JPMorgan, wrote in a note to clients last week.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net