Bloomberg News

U.S. Stocks Drop, Treasuries Gain as Bernanke Signals No QE3

June 07, 2011

June 7 (Bloomberg) -- U.S. stocks fell for a fifth day, the longest drop for the Standard & Poor’s 500 Index in 11 months, and Treasuries erased losses as Federal Reserve Chairman Ben S. Bernanke gave no sign he is planning new stimulus efforts to bolster the weakening economy.

The Standard & Poor’s 500 Index slipped 0.1 percent to 1,284.94 at 4 p.m. in New York, its lowest closing level since March 18. The 10-year U.S. Treasury yield decreased less than one basis point to 2.99 percent after rising as much as six points earlier, and two-year yields fell to their 2011 low. The euro climbed 0.8 percent to $1.4688, the strongest since May 5, as the European Central Bank signaled it may back Greek debt rollovers. Oil climbed on speculation increase in OPEC production quotas will reduce spare capacity.

The S&P 500 erased a rally of as much as 0.8 percent, turning lower in the final 10 minutes of trading, as Bernanke said in a speech in Atlanta that the economic recovery remains “uneven” and “frustratingly slow.” While the Fed chief said the central bank should maintain record monetary stimulus, he gave no indication he was planning a third round of asset purchases known as quantitative easing, nicknamed “QE3” by investors.

“Bernanke had a bearish outlook on the state of the economy,” said Kevin Shacknofsky, who helps manage $7 billion in Purchase, New York, for Alpine Mutual Funds. “There may have been some expectation for him mentioning that QE3 was on the table. But the key issues were his comments on the poor momentum of the U.S. economy and job growth as well as the risks that any fiscal austerity measures could damage a fragile economy.”

Slowing Growth

The S&P 500 is down 5.8 percent from an almost three-year high at the end of April as signs of a slowing economy spurred concern analyst estimates for 20 percent earnings growth this year are too optimistic. The slide has left the index trading at 12.2 times estimated profits of its companies, the cheapest forward valuation since last summer.

Figures last week showed that payrolls grew at the slowest pace in eight months, the jobless rate unexpectedly rose to 9.1 percent and a private gauge of manufacturing expanded at the slowest pace in more than a year.

“The economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke, 57, said today in a speech to a conference in Atlanta. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”

Leading Declines

Cisco Systems Inc., Bank of America Corp. and Hewlett- Packard Co. lost at least 1 percent to lead declines in the Dow Jones Industrial Average, which reversed a gain of as much as 89 points to close down 19.15 points, or 0.2 percent, at 12,070.81.

Intel Corp. rose 1.1 percent after Citigroup Inc. said that a potential foundry relationship may be forming with Apple Inc. International Paper Co. made a $3.31 billion hostile bid for Temple-Inland Inc., sending the target’s shares up 40 percent. International Paper, the world’s largest pulp-and-paper maker, advanced 0.4 percent.

Treasury two-year yields dropped two basis points to 0.41 percent. Yields on three-year notes dropped for a third day, slipping three basis points to 0.69 percent, after the U.S. government’s $32 billion auction of the debt drew the highest demand from a group including foreign central banks in five months. Longer-term debt yields were little changed before the $21 billion sale of 10-year notes tomorrow and the $13 billion 30-year bond offering June 9.

Euro Gains

The euro advanced 0.8 percent against the yen and appreciated versus 12 of its 16 most-traded peers. The dollar weakened against 11 of 16 major counterparts.

The ECB isn’t opposed to private-sector creditors being asked to “maintain their level of outstanding credit,” ECB President Jean-Claude Trichet said in Montreal yesterday, the first sign he endorsed measures to encourage investors to buy new Greek debt to replace maturing securities. German Chancellor Angela Merkel told U.S. President Barack Obama yesterday that the 17-nation euro region will overcome its debt crisis.

Most European stocks declined, with the benchmark Stoxx Europe 600 Index falling 0.1 percent to near a 10-week low, as losses in retail shares offset gains in utility companies. Tesco Plc and Home Retail Group Plc fell as a report showed U.K. retail sales declined last month. Utilities posted the best performance among 19 industry groups in the Stoxx 600, gaining 1.2 percent. Mitchells & Butlers Plc surged 3.8 percent after a report that a group of investors may bid for the pub and restaurant owner.

Oil Erases Drop

Oil erased declines in the final 90 seconds of trading, rising 8 cents to $99.09 a barrel. The S&P GSCI Index gained 0.7 percent as sugar, brent crude and lean hogs climbed more than 2 percent to lead gains in 17 of 24 commodities tracked by the index, while cotton and wheat lost at least 1.3 percent for the biggest declines.

The MSCI Emerging Markets Index gained 0.3 percent, after earlier falling more than 0.5 percent. Benchmark gauges in Russia and Turkey advanced more than 1 percent.

South Korea’s Kospi index dropped 0.7 percent and the won weakened against most major peers as the nation’s financial markets traded for the first time since a June 3 report showed slower-than-expected growth in U.S. payrolls. Thailand’s SET Index lost 1.1 percent after Goldman Sachs Group Inc. lowered its rating on the country’s stocks.

The Australian dollar slipped against 10 of its major counterparts after policy makers kept the nation’s benchmark interest rate unchanged for a sixth consecutive meeting and said current settings were appropriate.

--With assistance from Rita Nazareth, Cordell Eddings and Daniel Kruger in New York, Margot Habiby in Dallas, Shiyin Chen in Singapore and Stephen Kirkland in London. Editors: Michael P. Regan, Chris Nagi

#<508610.4614090.2.1.87.23378.25># -0- Jun/07/2011 21:08 GMT

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net.

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net.


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