U.S. Stocks Jump; S&P 500 Gains in Final Hour

By Michael P. Regan and Rita Nazareth - Oct 5, 2011 3:43 AM GMT+0700
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Specialist Michael Gagliano, foreground right, calls out prices at his post on the floor of the New York Stock Exchange on Oct. 4, 2011. Photographer: Richard Drew/AP

U.S. stocks rallied, driving the Standard & Poor’s 500 Index up 4.1 percent in the final 50 minutes, amid speculation European Union officials are examining how to recapitalize the region’s banks. Treasuries fell and the euro rallied.

The S&P 500 surged 2.3 percent to 1,123.95 at 4 p.m. New York time, sparing the benchmark measure of U.S. equities its first bear market, or 20 percent retreat from a peak, since 2009. Yields on Treasury 10-year notes climbed 6 basis points to 1.82 percent. The euro appreciated 1.1 percent to $1.3322. Futures on Germany’s DAX Index pared their loss to 1 percent from 4.9 percent.

Equities rebounded after the S&P 500 fell below 1,090.89, the closing level required to give the index a 20 percent slump from the three-year high reached on April 29. Stocks rose after the Financial Times quoted Olli Rehn, European commissioner for economic affairs, as saying there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign debt crisis. After U.S. markets closed, Belgian Prime Minister Yves Leterme said a “bad bank” to hold Dexia SA (DEXB)’s troubled assets will be set up.

“The European crisis has been the market driver,” Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co., said in a phone interview. “If Europe comes out with something to kick the can down the road, it buys them more time. We learned in 2008 how important the financial system is and how a ripple effect can occur.”

Morgan Stanley (MS) Jumps

Banks, brokerages and insurers led the rally as the S&P 500 Financials Index jumped 6.5 percent between 3:18 p.m. and 4 p.m. New York time. Morgan Stanley surged 17 percent and Bank of America Corp. (BAC) soared 10 percent during the same period.

Stocks were due for a rally after the S&P 500 fell 5.3 percent in the previous two sessions, said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management. His firm oversees $550 billion. The S&P 500 is trading for 12.3 times earnings in the last 12 months, close to the cheapest valuation since March 2009.

“The market doesn’t go on a straight line either up or down,” he said in a telephone interview. “There’s no sign of recession in the U.S., and yet the market is pricing for one. So you’re going to have days when things pop up and you’re going to have bear market rallies.”

200-Day Average

About 7 percent of S&P 500 stocks began the day trading above their average price in the last 200 days, according to data compiled by Bloomberg. That matched the proportion following the Aug. 8 rout for the lowest level in 30 months. The full index began today 14.1 percent below its 200-day moving average, the biggest gap since April 30, 2009.

U.S. stocks followed European shares lower earlier as some officials signaled bondholders may have to take bigger losses on Greek debt than previously negotiated. The possible breakup of Belgian bank Dexia and Deutsche Bank AG (DBK)’s abandonment of its profit forecast added to signs that contagion from the debt crisis is spreading. Goldman Sachs Group Inc. cut its global growth forecasts and predicted recessions in Germany and France.

Treasuries extended losses after the Financial Times report. Yields on 30-year bonds rose 9 basis points to 2.81 percent.

“People are looking for optimism anywhere they can get it,” said Christopher Bury, co-head of fixed-income rates at Jefferies & Co., one of the 22 primary dealers that trade with the Federal Reserve. “You have these random stories and the market reacts, but how many times have we been down this road where these are just words?”

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