U.S. Stocks Rebound, Treasuries Fall, Before Fed Meets
U.S. stocks staged the biggest rally of the year, rebounding from a rout that wiped out $1 trillion yesterday, and Treasuries fell amid speculation the Federal Reserve may signal plans to safeguard the economic recovery. Oil rose from a 10-month low.
The Standard & Poor’s 500 Index surged 2.5 percent to 1,146.97 at 10:32 a.m. in New York for its biggest gain since September. The gauge lost 6.7 percent yesterday, the most since December 2008. The drop in Treasuries, the benchmarks for the $34 trillion U.S. debt market that is more than twice the value of American equities, sent the 10-year yield up six basis points to 2.38 percent. The Stoxx Europe 600 Index climbed 0.9 percent after losing as much as 5.1 percent. Italian 10-year yields slid 12 basis points. The franc appreciated against its 16 major peers. Oil rallied 1.8 percent to $82.78 a barrel.
Fed policy makers will meet today after the unprecedented downgrade of the government’s top credit rating shook investor confidence in America’s economic recovery. Speculation is growing Chairman Ben S. Bernanke may announce new steps to pump up growth. Harvard University economist Kenneth Rogoff said the central bank will embark on a third round of asset purchases.
“The market has convinced itself that Bernanke is going to, or has to, say something to calm the markets,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., which oversees $663 billion, said in telephone interview. “It’s a matter of confidence. After yesterday’s drop in stocks, investors are hoping that the administration has gotten the message that they need to get their act together. The other part of it is that a lot of the measures we’re looking at are saying that relative to bonds, stocks are very cheap.”
The MSCI All-Country World Index rebounded after dropping as much as 2 percent today, extending declines from this year’s high in May to 20 percent, the threshold for a bear market.
The S&P 500 sank 11 percent in the previous three days and started today trading at 12.3 times reported earnings, compared with its average of 16.4 since 1954, according to data compiled by Bloomberg. The MSCI All-Country World Index is valued at about 12 times profits, down from 21 in 1995, the data show.
Investors fled riskier assets yesterday on the first trading day after S&P cut U.S. debt to the second-highest level of AA+ from AAA. Instead of declining, Treasuries rallied, sending the 10-year yield to the lowest since January 2009. The yield on the 10-year Treasury note jumped as much as 12 basis points today. The U.S. sells $32 billion of three-year notes today, the first of three auctions this week totaling $72 billion.
While yesterday’s stock rout wiped out about $2.5 trillion in global equity values, extending total losses since July 26 to $7.9 trillion, the Bank of America Merrill Lynch Global Broad Market Index of bonds has gained $132.4 billion since the end of July to a record $42.1 trillion.
Moody’s Investors Service reiterated yesterday that it affirmed the U.S. government’s top Aaa ranking because the dollar’s status as the main reserve currency allows it to support higher debt levels than other countries. Fitch Ratings affirmed its AAA grade for the U.S. last week. The U.S. AA+ rating at S&P is still higher than Japan or China.
The Fed will move “more decisively” to secure the U.S. recovery, Rogoff told Bloomberg Television in an interview. Bernanke and his colleagues, who are scheduled to release a statement at about 2:15 p.m. New York time, may prolong a pledge to maintain record monetary stimulus, said economists at JPMorgan Chase & Co., BNP Paribas and Goldman Sachs Group Inc.
Billionaire investor Wilbur Ross said he’s buying assets as the losses in global markets are being driven by fear rather than economic reality.
“Has the world really gotten 10, 12, 15 percent worse in the last 48 hours? I don’t think so,” Ross, who leads WL Ross & Co., said in an interview with Bloomberg Television. “Buying stocks at today’s prices over a couple of years’ time period will prove to be a uniquely rewarding experience.”
The yield on Italy’s 10-year note fell to 5.17 percent, after dropping 81 basis points yesterday. The extra yield investors demand to hold Italian 10-year securities instead of benchmark German bunds dropped 21 basis points to 282 basis points today, the least since July 26. The European Central Bank bought Italian and Spanish bonds for a second day, people familiar with the transactions said. Spain’s 10-year yield fell nine basis points to 5.06 percent today, extending yesterday’s slide.
Four years after BNP Paribas SA marked the start of a financial crisis by freezing withdrawals from investment funds because it wasn’t able to value subprime mortgage bonds, a reduction of the U.S. debt rating and escalating sovereign woes in Europe show credit markets are still fragile. The Markit iTraxx Crossover Index of credit-default swaps on mostly junk- rated European companies increased for an eighth day, adding 19 basis points to a mid-price of 594 today.
The Swiss franc appreciated 1.7 percent against the euro, and strengthened 2.2 percent versus the dollar. The yen climbed 0.7 percent against the dollar, while the euro gained 0.5 percent versus the U.S. currency. The pound declined 0.7 percent against the euro after a report showed U.K. manufacturing unexpectedly fell in June and the trade gap widened, adding to evidence that the economic recovery is faltering.
The MSCI Emerging Markets Index dropped 2 percent, flirting with a bear market for the first time since the global financial crisis in 2009. Russia’s ruble led developing-nation currencies lower, weakening 2.2 percent against the dollar.
The S&P GSCI index of 24 commodities rose 1.2 percent. Oil climbed 1.6 to $82.63 a barrel, reversing losses of as much as 6.9 percent. Gold added 0.4 percent in London, after jumping as much as 3.5 percent to a record $1,780.10 an ounce.