Bloomberg News

Stocks Drop, Dollar Advances as Fed Lowers Growth Forecast

June 22, 2011

June 22 (Bloomberg) -- U.S. stocks declined, breaking a four-day rally, after the Federal Reserve lowered its economic growth forecast and said it will complete a $600 billion bond- purchase program as scheduled this month. The dollar rose, and oil climbed following a decrease in inventories.

The Standard & Poor’s 500 Index fell 0.7 percent to 1,287.14 at 4:00 p.m. in New York, and the Stoxx Europe 600 Index dropped 0.6 percent. Ten-year U.S. note yields were almost unchanged, holding below 3 percent for a sixth day. The Dollar Index advanced 0.4 percent while the euro fell 0.5 percent to $1.4344. The pound weakened after some Bank of England members said more stimulus may be needed.

The S&P 500 halted its longest streak of gains of the month, having risen 2.4 percent over the past four days in a rebound from an almost three-month low. Stocks lost ground after Fed officials reduced their economic-growth projections, with much of the decline in the final hour of trading. The Fed, in a statement after a two-day policy meeting in Washington, left its benchmark interest rate in a range of zero to 0.25 percent and repeated a pledge to keep it there “for an extended period.”

“There was a bit of disappointment that the Fed downgraded their forecasts,” said Brad Sorensen, director of market and sector analysis at San Francisco-based Charles Schwab Corp., which has $1.7 trillion in client assets. “The ‘extended period’ language can’t be more specific because they don’t know what the economic data is going to be. There’s no way to know what happens over the next three months. So, there’s no way to know what policy will be in three months.”

‘Slower Pace’

Fed policy makers said they will maintain record monetary stimulus to support the flagging economic recovery after completing the bond-purchase program. “The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected,” the statement said. “The slower pace of the recovery reflects in part factors that are likely to be temporary,” such as supply chain disruptions stemming from the Japanese disaster in March.

Fed Chairman Ben S. Bernanke said at a press conference in Washington that the central bank can take additional actions to stimulate the economy “if conditions warranted.” Potential tools, which have risks or costs, include additional securities purchases or a reduction in the interest rate on excess bank reserves, Bernanke said.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in a Twitter post this morning that the Fed “will likely hint” at interest caps and QE3 -- a hypothetical third round of quantitative easing, which would involve the purchase of assets -- during its August meeting in Jackson Hole, Wyoming.

Shipping Demand

U.S. equity futures briefly trimmed losses before the open of exchanges after earnings from FedEx Corp. signaled that global shipping demand is improving. FedEx shares rallied 2.6 percent.

The Stoxx Europe 600 Index’s decline followed the gauge’s 1.4 percent advance yesterday, its biggest gain in two months. Royal Philips Electronics NV, the world’s biggest maker of light bulbs, tumbled 8.8 percent in Amsterdam trading after saying it will need to deepen cost-cutting to combat deteriorating demand for lighting and consumer electrical goods such as headphones.

Greece’s government won a vote of confidence and needs parliamentary approval next week for 78 billion euros ($112 billion) in budget cuts to prevent default.

Greek Bonds

The yield on the 10-year Greek bond fell 17 basis points to 16.81 percent, while the similar-maturity Irish yield advanced 31 basis points to 11.71 percent. The two-year German note yield slipped five basis points to 1.48 percent, dropping for the first time in four days. The Markit iTraxx Financial Index of credit-default swaps protecting the senior debt of 25 European banks and insurers climbed seven basis points to 161, according to JPMorgan Chase & Co.

The European Financial Stability Facility started selling 3 billion euros ($4.3 billion) of bonds due December 2016 to help fund euro-area nations’ contribution to the bailout of Portugal, according to two people with knowledge of the matter. The notes may be priced to yield about seven basis points more than the benchmark mid-swap rate and the issue is scheduled to be completed this week, said the people.

Crude oil rose for a third straight day, rising $1.24 to settle at $95.41 a barrel in New York as the U.S. Energy Department said stockpiles declined by 1.71 million barrels in the latest week. Inventories were forecast to drop by 1.83 million barrels, according to the median of analyst estimates in a Bloomberg News survey.

Emerging Markets

The MSCI Emerging Markets Index climbed 0.3 percent, for its first back-to-back gain in three weeks, as South Korea’s Kospi Index jumped 0.8 percent. Dubai’s DFM General Index retreated 1.8 percent after MSCI Inc., whose stock indexes are tracked by investors with about $3 trillion in assets, delayed to December its decision on whether to raise the United Arab Emirates and Qatar to emerging-market status.

The pound depreciated against all its 16 major counterparts. Bank of England officials voted 7-2 to keep interest rates on hold this month, with some warning that the economy is weakening. The BOE’s Spencer Dale and Martin Weale continued a push for a quarter-point increase in the benchmark rate. Governor Mervyn King and the other six members of the Monetary Policy Committee, including Ben Broadbent, voted for no change. Adam Posen kept up a call for more bond purchases.

--With assistance from Stephen Kirkland, Claudia Carpenter, Abigail Moses, Ben Martin, Andrew Rummer, Daniel Tilles and Jason Webb in London. Editors: Jeff Sutherland, Michael Regan

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Cecile Vannucci in New York at cvannucci1@bloomberg.net

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


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