Stocks, Euro Advance as Treasuries Drop

By Michael P. Regan and Rita Nazareth - Oct 7, 2011 4:28 AM GMT+0700

U.S. stocks rallied for a third day, commodities gained and Treasuries slid as European officials detailed plans to tame the sovereign debt crisis and reports on retail sales and jobless claims bolstered optimism in the economy. The euro reversed an earlier drop versus the dollar.

The Standard & Poor’s 500 Index gained 1.8 percent to 1,164.97 at 4 p.m. in New York. The Russell 2000 Index of smaller U.S. stocks extended a three-day advance to 11 percent, its best since 2009. The Stoxx Europe 600 Index surged 2.7 percent. Ten-year Treasury yields added 10 basis points to 1.99 percent. The euro rose 0.7 percent to $1.3439 after losing 0.8 percent. The S&P GSCI Index of commodities jumped 2.5 percent as oil increased 3.7 percent to $82.59 a barrel.

American equities extended a global rally after European Central Bank President Jean-Claude Trichet said the ECB will resume covered-bond purchases and reintroduce yearlong loans for banks, while defying calls for an interest-rate cut and acknowledging “downside risks” to the economy have intensified. The European Commission is pushing for a coordinated capital injection for banks to shield them from the fallout of a potential Greek default.

“People have priced in a Lehman II type of situation,” Brian Barish, Denver-based president of Cambiar Investors LLC, which oversees about $8 billion, said in a telephone interview. “You start to hear some credible stuff on European bank recapitalization. They will do what they’ve got to do to prevent a Lehman from happening. There’s a good chance we might’ve had a bottom in stocks.”

Covered Bonds

The 2.5 trillion-euro market for covered bonds -- assets backed by mortgages or public-sector loans -- underpins much of Europe’s real estate lending, which almost ground to a halt in the wake of Lehman Brothers Holdings Inc.’s collapse in September 2008.

U.S. stocks also climbed after claims for unemployment benefits rose less than forecast last week to a level that shows the pace of dismissals may be slowing. Applications for jobless benefits climbed by 6,000 to 401,000, Labor Department figures showed. Economists projected 410,000 claims, according to the median estimate in a Bloomberg News survey. The monthly average dropped to the lowest level since the end of August.

Government data tomorrow are forecast to show employers added 55,000 jobs last month and the unemployment rate held at 9.1 percent, according to the median estimates.

Bear Market Averted

The S&P 500 has rebounded 6 percent since Oct. 3, when it closed within 1 percent of a level that would have marked a bear-market plunge of 20 percent from its April peak. The S&P GSCI commodities gauge is up 5.3 percent in two days, its best back-to-back advance since May, and has trimmed its drop from this year’s high to 20 percent. Treasury yields have increased after demand for safer assets dragged the 10-year note’s rate to a record low of 1.67 percent on Sept. 23. The Dollar Index has slipped about 1.1 percent since Oct. 4, when it reached the highest level since January.

Indexes of financial, commodity and consumer companies rose at least 2.2 percent today to lead gains in all 10 industry groups in the S&P 500. Bank of America Corp. jumped 8.8 percent and Alcoa Inc. rallied 5.4 percent for the top gains in the Dow Jones Industrial Average.

The S&P 500 Financials Index has rallied 8.8 percent in three days, its steepest advance since July 2009, to trim its year-to-date loss to 23 percent. U.S. Treasury Secretary Timothy F. Geithner told the Senate Banking Committee today that there is “absolutely” no chance of another U.S. financial institution collapsing like Lehman Brothers.

Retail Sales, Apple

Target Corp. climbed 4.3 percent today and Limited Brands Inc. and Saks Inc. also rose after reporting September sales that surpassed analysts’ projections. Apple Inc. shares slipped 0.2 percent after co-founder Steve Jobs died.

The cost to protect the debt of Morgan Stanley and Citigroup Inc. declined amid growing speculation Europe’s leaders will be able to prevent the debt crisis from infecting bank balance sheets.

Credit-default swaps on Morgan Stanley, the owner of the world’s biggest retail brokerage, fell 55 basis points to 475, the biggest decline since May 2009, and those on Citigroup slid 40.5 basis points to 304.57, the largest drop since Nov. 24, 2008, according to data provider CMA. Swaps on Goldman Sachs Group Inc. eased 25 basis points to 371, the data show.

Wall Street strategists say the S&P 500 will post the biggest fourth-quarter rally in 13 years even after they cut forecasts at a rate exceeded only during the credit crisis.

The benchmark index for U.S. stocks will climb 14 percent from yesterday to end 2011 at 1,300, according to the average estimate of 12 strategists surveyed by Bloomberg. The last time they were this bullish in October was 2008, when the group predicted a 27 percent gain and the index lost 18 percent.

Trading Range

Excluding its dip to a 13-month closing low of 1,099.23 on Oct. 3, the S&P 500 has mostly traded between about 1,120 and 1,220 for the past two months. Following 14 periods since 1990 when the index was stuck in a range, more than 75 percent resulted in gains in the next one, three and six months, according to Birinyi Associates Inc., the Westport, Connecticut- based money management and research firm. The average trading range studied lasted about seven months, with the shortest beginning in March 1998 and lasting three months, Birinyi data show.

“We’ll need clear economic data or policy movements out of Europe to break out of that range,” Wasif Latif, vice president of equity investments at USAA Investment Management Co. in San Antonio, which oversees about $50 billion, said in a telephone interview.

Earnings Season

Alcoa Inc., the largest U.S. aluminum producer, will mark the unofficial start of the earnings-reporting season when it reports results on Oct. 11. Third-quarter profits for S&P 500 companies are projected to have grown 13 percent, according to analyst forecast compiled by Bloomberg, down from an estimate of 17 percent when the index traded at a three-year high at the end of April.

Among European stocks, BNP Paribas SA, Credit Agricole SA and Natixis surged at least 5.3 percent after Le Figaro said the French government is working on a contingency plan to take stakes in the country’s lenders. BHP Billiton Ltd., the world’s biggest mining company, rallied 5.9 percent as metal prices increased. SABMiller Plc surged 7 percent after a report by Brazilian news website IG said the brewer is in talks to be bought by Anheuser-Busch InBev NV. Spokespeople for both companies declined to comment.

Bonds, Currencies

Ten-year Spanish and Italian bond yields decreased seven basis points each, while rates on U.K., French and German debt rose at least four points.

The dollar weakened against 14 of 16 major peers today, with the Brazilian real surging 2.7 percent to lead gains after higher-than-forecast inflation spurred bets the central bank may slow the pace of interest-rate cuts.

The euro strengthened versus 10 of 16 major peers. The pound slid against all 16 major peers after the Bank of England expanded its bond-purchase program. The Australian and New Zealand currencies strengthened against most peers.

Copper futures climbed 4.5 percent to $3.2465 a pound in New York and rallied 5.9 percent in London to lead gains in 19 of 24 commodities tracked by the S&P GSCI Index.

The MSCI Emerging Markets Index of stocks surged 3.7 percent, extending its rebound from a two-year low on Oct. 4. Benchmark indexes in South Korea, Brazil and Chile climbed at least 2.5 percent.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

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