By Stephen Kirkland and Rita Nazareth - Oct 27, 2011 8:42 PM GMT+0700
Stocks surged, extending the biggest monthly rally in U.S. equities since 1987, and the euro strengthened as European leaders agreed to expand a bailout fund to stem the region’s debt crisis. Treasuries and bunds fell, while metals and oil led a rally in commodities.
The Standard & Poor’s 500 Index climbed 2.5 percent to 1,272.6 at 9:38 a.m. in New York, extending its October advance to more than 12 percent and erasing its 2011 loss. The MSCI All-Country World Index gained 3.7 percent as benchmark gauges in France, Germany and Italy jumped more than 5 percent. While Italian and Spanish bonds rallied, yields remained near levels of two weeks ago. The euro appreciated above $1.40 for the first time since Sept. 8. Ten-year Treasury yields gained nine basis points. Copper rose almost 5 percent.
French President Nicolas Sarkozy said the euro region’s bailout fund will be leveraged by four to five times, and investors have agreed to a voluntary writedown of 50 percent on Greek debt. Sarkozy is due to speak to Chinese leader Hu Jintao today and said he’d welcome support from the Asian nation in the bailout effort. U.S. data today showed the world’s largest economy expanded last quarter at the fastest pace in a year.
“Europe has done enough for the time being,” Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., said in a telephone interview. His firm oversees $3.3 trillion as the world’s largest asset manager. “It will remove near-term pressure,” he said. “In the U.S., the GDP report was decent and it was encouraging to see the consumer hold. The fear of a recession is fading.”
The U.S. economy grew at a 2.5 percent annual rate in the third quarter, matching the median forecast of economists surveyed by Bloomberg, according to figures from the Commerce Department. Other data may show pending home sales gained in September.
Banks Rally
The Stoxx Europe 600 Index climbed 3.8 percent to a 12-week high as banks led gains. BNP Paribas SA and Deutsche Bank AG, the biggest lenders in France and Germany, advanced more than 15 percent. BASF SE rallied 6.9 percent as the world’s largest chemicals maker reported profit that beat analyst estimates. Ericsson AB rose 5.3 percent as Sony Corp. agreed to buy its 50 percent stake in their joint mobile-phone venture.
The bund yield jumped as high as 2.20 percent, rising to the most since Oct. 17, while the 10-year Spanish yield fell 18 basis points. That drove the difference in yield with German debt down by 30 basis points to 3.13 percent, the lowest since Oct. 14 on a closing basis.
‘Red Flag’
Even after today’s gains, the bonds of some of Europe’s most-indebted countries are still trading near their historical lows. Greece’s two-year yield slid 69 basis points to 79.08 percent today, compared with an average of 27.62 percent in the past year. Italy’s 10-year yield, which averaged 4.94 percent in the past 12 months, fell 12 basis points to 5.80 percent.
“If we’re not seeing the sovereign debt markets turn around, that is a red flag,” Michael Darda, the Stamford, Connecticut-based chief economist and chief market strategist at MKM Partners LP, told Bloomberg Television. “Equity markets have gotten optimistic here. One of the things that bothers me is the euro-zone debt markets have not registered the same degree of optimism, and that’s really the core of the problem.”
Default Swaps
The Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropped 32 basis points to 302, the lowest since Sept. 1. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 56 basis points to 664 basis points, the lowest since Sept. 1, according to JPMorgan Chase & Co.
The EU agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association’s rules. ISDA will decide if the credit-default swaps should pay out depending on whether it judges losses to be voluntary or compulsory. European leaders said in the agreement they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new debt.
The 10-year Treasury yield climbed as high as 2.3084 percent, while the seven-year yield increased seven basis points before the U.S. sells $29 billion of the securities, the last of three auctions this week totaling $99 billion.
Federal Reserve Bank of New York President William C. Dudley said on Oct. 24 that policy makers have the option of starting a third round of asset purchases to stimulate growth. Bank of England Markets Director Paul Fisher said yesterday expanding monetary stimulus by 75 billion pounds ($120 billion) this month was the minimum amount needed to shore up an economy that may already be shrinking.
Dollar Slips
The euro climbed as high as $1.4070, and advanced 1.2 percent versus the yen. The Dollar Index, which tracks the U.S. currency against those of six trading partners, slid 1.1 percent to the least since Sept. 8.
The S&P GSCI index of 24 commodities gained 2.1 percent. Nickel jumped 3.9 percent and copper rose to $8,059 a metric ton. Gold fell 0.7 percent to $1,712 an ounce, after gaining 6.4 percent the previous four days. Oil in New York advanced 3.8 percent to $93.60 a barrel.
The MSCI Emerging Markets Index jumped 2.9 percent to a seven-week high. Russia’s Micex climbed 2.8 percent, Hungary’s BUX gained 3.6 percent and the Hang Seng China Enterprises Index of mainland companies listed in Hong Kong rallied 5.1 percent. Benchmark gauges in Poland, South Africa, Turkey and Thailand advanced more than 2 percent.
To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net
To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net
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