Bloomberg News

Stocks, Treasuries Rally on Earnings, Deficit Plan; Oil Surges

July 19, 2011

July 19 (Bloomberg) -- Stocks surged, sending the Standard & Poor’s 500 Index to its biggest gain in four months, and Treasuries rallied amid optimism lawmakers were moving closer to a deal that would cut the U.S. budget deficit and avoid default. Oil helped lead gains in commodities and the dollar fell.

The S&P 500 jumped 1.6 percent to 1,326.73 at 4 p.m. in New York, its biggest gain since March 3. The S&P GSCI Index of 24 commodities advanced 1 percent as oil surged 1.6 percent to $97.50 a barrel. Ten-year Treasury note yields lost five basis points to 2.88 percent and the Dollar Index, a gauge of the currency against six major peers, slipped 0.5 percent. Nasdaq-100 Index futures climbed 0.7 percent at 5:12 p.m. after Apple Inc. beat earnings estimates.

Stocks added to an early advance and Treasuries climbed after President Barack Obama endorsed a deficit-cutting proposal by a bipartisan group of senators known as the “Gang of Six.” Earlier gains in global equities were triggered by higher-than- estimated results at companies from International Business Machines Corp. to Coca-Cola Co. and Novartis AG.

“We’re getting positive news flow on two fronts today: the political front related to the national debt ceiling and we have the reports coming out of the earnings season,” Keith Wirtz, who helps oversee $18 billion as chief investment officer for Fifth Third Asset Management in Cincinnati, said in a telephone interview. “A good earnings season might put a floor in this stock market.”

Apple Gains

Apple rose 5.1 percent to $395.89, and exceeded $400 for the first time, following the regular trading session. Apple beat the average estimate for per-share earnings by 33 percent, lifted by sales of iPhones and iPads.

The S&P 500 erased yesterday’s 0.8 percent slide and rebounded from a three-week low. S&P 500 technology shares climbed 2.7 percent as a group, the most in a year, to lead gains among all 10 of the index’s main industries.

IBM jumped 5.7 percent to an all-time high of $185.21 to lead gains in the Dow Jones Industrial Average, which surged 202.26 points, or 1.6 percent, to 12,587.42 in its first gain of more than 200 points this year. Coca-Cola Co. climbed 3.3 percent, Wells Fargo & Co. added 5.7 percent and Harley-Davidson Inc. rallied 8.9 percent after each reported higher-than- estimated results.

Goldman Sachs Group Inc. lost 0.7 percent after the fifth- biggest U.S. bank by assets reported second-quarter profit that trailed analysts’ estimates. Goldman Sachs was one of only five S&P 500 companies to post quarterly results that trailed estimates since the reporting season started. Per-share earnings have topped analysts’ estimates at 31 of the 36 companies in the S&P 500 that released earnings since July 11, according to Bloomberg data.

‘Finally Shining’

“Profits are finally shining through some of the daunting headlines and investors are taking notice,” Jack Ablin, chief investment officer for Chicago-based Harris Private Bank, which oversees $55 billion, said in a telephone interview. “IBM was a big one,” he said. It sent “a strong signal that companies can still thrive in an uncertain economic environment.”

All 12 stocks in an S&P gauge of homebuilders advanced after U.S. housing starts increased more than forecast in June to the fastest pace in five months. Work began on 629,000 houses at an annual pace, up 14.6 percent from the prior month, figures from the Commerce Department showed. Housing starts were projected to rise to a 575,000 annual rate

Murdoch Speaks

News Corp. shares rallied 5.5 percent. Chairman and Chief Executive Officer Rupert Murdoch told U.K. lawmakers that he wasn’t responsible for the phone-hacking scandal at the company’s News of the World newspaper, saying that the blame lies with the “people that I trusted to run it.”

Thirty-year U.S. bonds rallied, sending their yield down 13 basis points to 4.18 percent, after Obama endorsed a bipartisan deficit-cutting proposal as “broadly consistent” with his administration’s approach. The plan to shave about $3.7 trillion from the debt over 10 years put forward by the senators is “a very significant step,” Obama said. While the administration hasn’t yet had a chance to review the Senate proposal in depth, “we’re in the same playing field,” he said.

“We don’t have any more time to posture,” Obama said in remarks at the White House. Time is running out to raise the debt limit before Aug. 2, when the Treasury Department has said the U.S. risks going into default, a step that would roil financial markets, he said.

Cotton, Corn

Cotton and corn rose at least 1.5 percent to help lead gains in 18 of 24 commodities tracked by the S&P GSCI Index amid concern that hot, dry weather will hurt crop output. Gold futures fell $1.30 to $1,601.10 an ounce after reaching an intraday record of $1,610.70 an ounce yesterday following a 10- day streak of gains, the longest rally since 1980.

Almost five stocks gained for each that fell in the Stoxx Europe 600 Index, which rebounded from the lowest level since November. Novartis jumped 3.2 percent. SAP AG, the world’s biggest maker of business software, and Cap Gemini SA, Europe’s largest computer-services company, rose more than 1.7 percent after IBM’s earnings. Electrolux AB, the world’s second-biggest appliance maker, sank 15 percent as profit missed estimates.

The Stoxx 600 has tumbled 9.2 percent from this year’s high on Feb. 17 amid concern the region’s debt crisis is spreading and U.S. lawmakers will fail to reach a deal to raise the country’s debt limit. The retreat left the gauge trading at about 12.5 times the reported profits of its companies, near the cheapest since 2008. The S&P 500 has declined 2.7 percent from a three-year high in April and started today’s session trading at 14.8 times reported earnings, the cheapest this month.

European Swaps

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments fell 9.6 basis points to 296.85 basis points, retreating from an all-time high. The yield on Spanish 10-year bonds declined 22 basis points to 6.09 percent, driving the difference in yield with benchmark bunds 25 basis points lower to 342 basis points. Spain sold 4.45 billion euros ($6.3 billion) of 12- and 18-month bills, compared with a maximum target of 4.5 billion euros, according to the Bank of Spain.

The yield on Greece’s two-year notes surged 304 basis points to 39.02 percent after the government auctioned 1.625 billion euros of 13-week Treasury bills with a uniform yield of 4.58 percent. Italy’s 10-year yield dropped 23 basis points to 5.10 percent, with Portugal’s down four basis points to 12.6 percent.

Second Meeting

European Union leaders plan to meet for the second time in a month this week, aiming to break a deadlock over a new Greek rescue. German Chancellor Angela Merkel said Europe’s sovereign crisis can’t be fixed “in one step,” damping expectations that government leaders can resolve the region’s debt woes at a July 21 summit.

Greece’s sovereign-debt crisis risks infecting the rest of the euro region even if officials avert a default, threatening the global economic recovery, the International Monetary Fund said. Both the European Commission and the European Central Bank “considered that a sovereign default or a credit event would likely trigger contagion to the core euro-area economies with severe economic consequences,” according to an IMF staff report on the region’s economy.

“Staff however also saw serious risks of contagion, even under a strategy which tries to avoid default or credit events,” the report said.

The MSCI Emerging Markets Index added 0.6 percent. The Bombay Stock Exchange Sensitive Index climbed 0.8 percent as earnings from HDFC Bank Ltd., the nation’s third-biggest lender, topped analysts’ estimates. South Africa’s FTSE/JSE Africa All Share Index advanced 0.6 percent on higher metals prices.

The Shanghai Composite Index declined 0.7 percent as China Merchants Bank Co., the country’s sixth-largest lender, said it planned to raise as much as 35 billion yuan ($5.4 billion) in a rights offer.

--With assistance from Julie Cruz in Frankfurt and Claudia Carpenter, Abigail Moses, Andrew Rummer, Daniel Tilles, Jason Webb and Stephen Kirkland in London. Editors: Michael Regan, Nick Baker

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

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


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