Bloomberg News

Stocks, Treasuries, Oil Decline as Bernanke Damps Stimulus Bets

July 14, 2011

July 14 (Bloomberg) -- Stocks fell, dragging the Standard & Poor’s 500 Index to the lowest level of the month, and oil slumped after Federal Reserve Chairman Ben S. Bernanke said he’s not prepared to take immediate action to stimulate the economy. Gold and silver rallied, while U.S. Treasuries dropped.

The S&P 500 slumped 0.7 percent to 1,308.87 at 4 p.m. in New York, the weakest close since June 29. The MSCI All-Country World Index lost 0.7 percent. Ten-year Treasury yields climbed seven basis points to 2.96 percent amid concern political gridlock will cause the U.S. to lose its top credit rating. Crude slid 2.4 percent to $95.69 a barrel, while gold touched a record $1,594.90 and ounce and silver jumped as much as 3.3 percent to a nine-week high of $39.395 an ounce.

Bernanke’s remarks damped investor speculation that the Fed may launch a third round of quantitative easing, nicknamed “QE3” by investors, and snuffed out an early rally in stocks triggered by better-than-forecast earnings at JPMorgan Chase & Co. and improving economic data. Treasuries slid after Moody’s Investors Service said yesterday it may cut the U.S. government’s Aaa rating after negotiations to increase the debt limit stalled in Congress.

“Bernanke may have spooked markets, but the markets better get used to no QE3,” Brian Belski, chief investment strategist at Oppenheimer & Co., said in a telephone interview. “All eyes are on Washington in terms of the budget. We’re in this classic tug-of-war between micro and macro because of the earnings season, which is still very early. It’s still too soon to put a defining word on earnings.”

Gain Erased

The S&P 500 erased yesterday’s 0.3 percent gain, which snapped a three-day slump that dragged it down 2.9 percent. Yesterday’s advance was triggered by Bernanke’s testimony to the Senate Banking Committee that the central bank is prepared to take additional action to spur growth, including buying more government bonds, if the economy appears in danger of stalling.

Stocks erased gains today as Bernanke told Congress that policy makers were not prepared “at this point” to embark on the third round of bond-buying.

Industrial, technology and raw-material companies fell the most among the 10 main industry groups in the S&P 500 today. 3M Co., Oracle Corp. and DuPont Co. paced losses with declines of at least 1.3 percent. JPMorgan Chase & Co. rallied 1.8 percent for the biggest gain in the Dow Jones Industrial Average after investment-banking and trading bolstered earnings.

Earnings Season

JPMorgan was the first major U.S. bank to report second- quarter earnings. Google Inc., the biggest Internet search company, rallied 11 percent in extended trading after reporting sales and profit that topped analysts’ estimates following the close of trading. Earnings grew 18 percent and surpassed analysts’ estimates by 5.5 percent for the eight companies in the S&P 500 that have released results since Alcoa Inc. started the reporting season on July 11, data compiled by Bloomberg show.

“The market is being driven by macro events such as the U.S. and European debt crises,” Giri Cherukuri, who helps manage $2.6 billion as money manager and head trader at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. “But we’re heading into the heart of earnings season, and people are getting ready for a change toward a market that’ll be focused on the earnings reports of major companies.”

Economic Data

Early gains in stocks were also spurred by government reports that showed initial jobless claims fell by 22,000 to 405,000 last week and retail sales unexpectedly increased 0.1 percent in June. Other data showed U.S. wholesale costs dropped more than forecast in June.

The Dollar Index, a gauge of the currency against six major peers, was little changed at 75.265 after slumping for two days.

The dollar weakened 0.4 percent versus the New Zealand dollar, which strengthened against all 16 major peers monitored by Bloomberg after a report showed manufacturing and farming led the fastest quarterly growth in more than a year, spurring speculation the central bank will raise interest rates.

The yield on the 30-year Treasury bond climbed seven basis points to 4.25 percent.

The Treasury attracted higher-than average-demand for a third consecutive sale at today’s auction of 30-year bonds as investors downplayed Moody’s warning that the nation’s rating may be downgraded. The bid-to-cover ratio on the $13 billion in bonds, which gauges demand by comparing total bids with the amount offered, was 2.80, versus a 2.64 average at the past 10 sales. The auction followed three- and 10-year note sales that were the first since the Federal Reserve ended its bond purchases under quantitative easing on June 30.

Moody’s put the Aaa credit rating on review for a downgrade for the first time since 1996 yesterday on concern officials won’t raise the nation’s $14.3 trillion debt limit in time to prevent a missed payment. The rating would probably be reduced to the Aa range, Moody’s said in a statement yesterday.

Default Swaps Rise

Credit-default swaps insuring U.S. debt climbed 5.22 basis points to 55.72 as of 3:31 p.m. in New York, the highest since February 2010, according to CMA.

Italian government bonds declined, sending the 10-year yield up nine basis points to 5.62 percent, as borrowing costs rose to a three-year high at a sale of five-year debt today even as the nation’s Senate voted for budget cuts.

The yield on the Spanish 10-year bond rose six basis points to 5.84 percent, driving the premium investors demand to hold the debt instead of benchmark German bunds five basis points higher to 312 basis points.

More than six shares fell for every one that advanced in the Stoxx Europe 600 Index, which slid 0.8 percent. Software AG, Germany’s second-biggest maker of business software, plunged 16 percent after reporting a decline in sales. Daily Mail & General Trust Plc lost 4.1 percent as the publisher of the Daily Mail newspaper said advertising revenue fell.

--With assistance from Shiyin Chen in Singapore, Stephen Kirkland, Claudia Carpenter, Abigail Moses, Andrew Rummer and Daniel Tilles in London and Nick Baker, Mary Childs, Daniel Kruger and Susanne Walker in New York. Editors: Michael Regan, Nick Baker

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Victoria Stilwell in New York at vstilwell@bloomberg.net

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


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