Bloomberg News

Treasuries, Dollar Gain on Economy Concern as Stocks Trim Losses

August 01, 2011

Aug. 1 (Bloomberg) -- A rally in Treasuries sent 10-year yields to the lowest level since November and the dollar rose after a gauge of manufacturing weakened to a two-year low. U.S. stocks pared losses as lawmakers expressed optimism Congress will pass a plan to increase the debt ceiling.

Ten-year Treasury yields fell five basis point to 2.75 percent at 4 p.m. in New York. The Dollar Index rose 0.5 percent as the euro slipped 1 percent to $1.4261 and Italian and Spanish bonds reversed gains amid concern a deteriorating global economy will worsen the European debt crisis. The Standard & Poor’s 500 Index, which gained as much as 1.2 percent during the session and fell as much as 1.4 percent, ended down 0.4 percent at 1,286.94 for a sixth straight loss.

Treasuries rallied and equities continued a slump that dragged the S&P 500 down 3.9 percent last week, its worst drop in a year, as the Institute for Supply Management’s factory index sank to its lowest level since manufacturing last contracted in July 2009. Other reports today revealed factory indexes from Asia to Europe fell last month as demand weakened.

“The ISM figures got people concerned about the third quarter,” Peter Jankovskis, who helps manage about $2.6 billion at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. “That was certainly a negative surprise offsetting the optimism about a final vote on the debt ceiling.”

Thirty-year U.S. bond yields decreased three basis points to 4.09 percent, also the lowest since November. Five-year credit-default swaps on Treasuries dropped eight basis points to 54, the biggest retreat since February 2010, according to data provider CMA.

ISM Sinks Stocks

The S&P 500 surged to its high for the session in the first half hour of trading, before erasing gains after the ISM factory gauge, released at 10 a.m. New York time, fell to 50.9 in July from 55.3 the prior month. Economists projected the gauge would drop to 54.5, according to the median forecast in a Bloomberg News survey. Other reports showed U.K., Russian and Australian manufacturing shrank, while the pace of factory growth slowed in Europe and China.

Today’s data added to concern that the economic recovery is faltering after the U.S. Commerce Department reported last week that American gross domestic product rose at a less-than- forecast 1.3 percent annual rate in the second quarter following a 0.4 percent gain in the prior quarter that was less than previously estimated.

“Already the market is turning its focus away from this deal to the global economic deceleration,” Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp., said in an interview on Bloomberg Television. “I think we see a continuation of the kind of turbulence, range-bound over the course of the last several months,” he said. “It’s not just the U.S. It’s Europe.”

Medicare Rates

Health-care stocks led declines among eight of the 10 main S&P 500 industries, falling 1.7 percent as a group. Medicare, the U.S. health plan for the elderly and disabled, announced an 11.1 percent rate cut for next year. Health Care REIT Inc., an investment trust specializing in senior housing and health-care real estate, plunged 8.5 percent for the biggest loss in the S&P 500.

Merck & Co. and Home Depot Inc. lost more than 1.9 percent to lead declines in 21 of 30 stocks in the Dow Jones Industrial Average. The Dow closed 10.75 points, or 0.1 percent, lower at 12,132.49 after climbing as much as 139 points in the first half hour of trading and losing more than 145 points by midday.

All Eyes on Congress

Stocks recovered from their lows of the session as Republican leaders and the Obama administration voiced optimism that Congress will pass a compromise plan to raise the U.S. debt limit by at least $2.1 trillion and slash federal spending by $2.4 trillion or more. The House plans to vote today on the agreement after a months-long struggle over raising the $14.3 trillion ceiling before the nation’s borrowing capacity expires tomorrow. Senate Majority Leader Harry Reid said a Senate vote “could happen either tonight or tomorrow.”

The dollar strengthened versus 10 of 16 major peers, while the yen weakened against 11 of 16 after rallying versus most earlier. Japan expressed the intention to sell the yen as needed to curb its appreciation, Nikkei reported.

The Stoxx Europe 600 Index retreated 1.2 percent to an eight-month low and extended its slide from this year’s high in February to 10 percent. Banks helped lead losses, with Spain’s Banco Santander SA down 3.8 percent and Italy’s Intesa Sanpaolo SpA losing 7.9 percent.

Earnings Season

While 78 percent of S&P 500 companies that reported earnings since July 11 topped analysts’ average per-share estimates, profits at European companies are trailing projections by the most in at least five years, dragged down by manufacturing companies that had been forecast to lead a rally in the second half of the year. About 52 percent of companies in the Stoxx 600 that have reported earnings since July 11 missed analysts’ projections.

Spain’s 10-year bond yield rose 12 basis points to 6.16 percent, while Italy’s increased 14 basis points to 5.99 percent.

Oil fell 0.9 percent to a one-month low of $94.89 a barrel in New York, reversing a rally of as much as 3 percent. Gold futures for December delivery retreated from a record, slipping 0.6 percent to $1,621.70 an ounce after sinking 1.4 percent earlier. The S&P GSCI Index of 24 commodities lost 0.3 percent after surging 2.1 percent in morning trading.

Commodities beat stocks, bonds and the dollar for the first time in three months in July as expectations that China’s booming economy will spur demand for raw materials outweighed the debt crises in the U.S. and Europe.

The S&P GSCI Total Return Index of 24 commodities rose 2.4 percent in July, ending two months of losses, while the MSCI All-Country World Index of shares slipped 1.7 percent. Bonds of all types returned an average 0.8 percent, according to Bank of America Merrill Lynch’s Global Broad Market Index. The Dollar Index fell 0.6 percent and touched a 10-week low.

--Editors: Nick Baker, Michael P. Regan

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

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


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