Bloomberg News

Treasuries, Gold Rise on Consumer Confidence; U.S. Stocks Climb

August 30, 2011

Aug. 30 (Bloomberg) -- Treasuries and gold rose after consumer confidence sank to a 28-month low, while U.S. stocks climbed to a four-week high on speculation the Federal Reserve will enact more stimulus to safeguard the recovery.

Treasury 10-year yields dropped eight basis points to 2.18 percent at 4 p.m. in New York. The Standard & Poor’s 500 Index climbed 0.2 percent to 1,212.92, after losing as much as 1.2 percent on the consumer confidence report. The Stoxx Europe 600 Index increased 1 percent, paring an earlier advance of 1.8 percent. Italian bonds retreated for a seventh day after the nation sold debt. The euro fell against 11 of its 16 major peers. Gold rose 2.1 percent and oil climbed 1.9 percent.

The Fed said in minutes of its meeting released today that some policy makers, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted at the Aug. 9 gathering of the Federal Open Market Committee to hold its key interest rate at a record low until mid-2013.

“You still have the Fed in your corner,” Mark Foster, who helps manage $500 million at Kirr Marbach & Co. in Columbus, Indiana, said in a telephone interview. “That gives you confidence in a market like this especially after the volatility we’ve seen in the last few weeks, which was so unsettling.”

The S&P 500 rose to the highest level since Aug. 3 after surging 7.7 percent in the previous six days. The index has gained 8.4 percent since Aug. 8, after the loss of the U.S. government’s AAA credit rating left the S&P 500 trading for 12.2 times earnings, the lowest level since 2009, according to data compiled by Bloomberg.

Fed Minutes

When the Fed met on Aug. 9, the S&P 500 had plunged 17 percent since July 22, including a 6.7 percent drop the previous day that was the biggest slump since 2008.

The Fed minutes of their meeting indicate officials will more fully debate their options when they meet next month for a two-day meeting that was originally scheduled to last one day. Fed officials discussed a range of tools, including buying more government bonds, to bolster the economy. They didn’t come to an agreement on what the Fed’s next step might be should the economy continue to weaken.

At the same time, some Fed officials “judged that none of the tools available” to the Fed “would likely do much to promote a faster economic recovery,” the minutes said.

‘Lots of Crosscurrents’

Chairman Ben S. Bernanke indicated last week that the U.S. isn’t deteriorating enough to warrant immediate stimulus. Any new easing could face more opposition from some Fed presidents. Dallas Fed President Richard Fisher, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis voted against the Fed’s August statement that pledged to keep rates near zero at least until mid-2013.

“There are just lots of crosscurrents going on,” Don Wordell, a fund manager for Atlanta-based RidgeWorth Capital Management, which oversees about $48 billion, said in a telephone interview. “The message is that the Fed is here, they just won’t stop, they will keep their accommodative policy. At the same time, there’s a view that there’s not much left in terms of the policies being as impactful as they were two years ago.”

Stocks dropped and Treasuries rallied earlier as the Conference Board’s confidence index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July. It was the biggest point drop since October 2008. Economists predicted the August gauge would fall to 52, according to the median forecast in a Bloomberg News survey.

Home Values

Equities also retreated after the S&P/Case-Shiller index of property values in 20 cities fell 4.5 percent from June 2010. The index declined 4.6 percent in the 12 months ended in May. The median forecast of 31 economists surveyed by Bloomberg News projected a 4.6 percent drop.

The Morgan Stanley Cyclical Index of companies most-tied to economic growth added 0.4 percent after sinking 1.4 percent. Caterpillar Inc. rose 1.9 percent, while Boeing Co. gained 2.2 percent. The KBW Bank Index of 24 stocks fell 1 percent, snapping a two-day rally. Bank of America Corp. slumped 3.2 percent.

The yield on 30-year Treasuries slipped seven basis points to 3.52 percent as demand increased for the safest assets.

“Treasuries are reflecting the continuous negative economic surprises,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “There was nothing much new in the Fed minutes. However, there is really a difference of opinion on the Fed as to how much dry powder they have left, and even if they can do something, should they given increasing levels of inflation in the market.”

Treasury Bet

Pacific Investment Management Co.’s Bill Gross, who runs the world’s largest bond fund, said in a Financial Times interview it was a mistake to cut his Treasury holdings and he wished he’d invested in more U.S. government debt earlier this year.

Treasuries have returned almost 7 percent since February, when Gross eliminated the Total Return Fund’s holding of U.S. government securities. He boosted Treasuries to 10 percent of assets in July from 8 percent in June.

Gold rose 2.1 percent in New York on speculation that the Fed will ease monetary policy further to stimulate the economy, boosting the appeal of the precious metal as an alternative asset. The metal, which settled at $1,829.80, is up 29 percent this year, outperforming global stocks, commodities and Treasuries.

Return From Holiday

The Stoxx 600’s increase extended yesterday’s 1.2 percent advance, with U.K. stocks leading gains after a public holiday. Britain’s benchmark FTSE 100 Index jumped 2.7 percent as Royal Bank of Scotland Group Plc and Barclays Plc advanced more than 6.7 percent. Greece’s EFG Eurobank Ergasias SA sank 14 percent after soaring 29 percent yesterday on an agreement to be bought by rival Alpha Bank SA.

Stocks in the region pared gains after the European Commission said confidence in the economic outlook plunged in August by the most since December 2008.

Italy’s 10-year yield rose four basis points after demand dropped at the government’s sale of bonds maturing in 2022. The European Central Bank has restrained Italy’s borrowing costs in the past three weeks by buying its securities in the secondary market amid contagion from the sovereign debt crisis. Prime Minister Silvio Berlusconi agreed to overhaul the 45 billion- euro ($65 billion) austerity plan that persuaded the ECB to support the country’s bonds.

German bonds rose, pushing the 10-year yield down seven basis points to 2.15 percent.

European Interest Rates

The euro weakened against most major counterparts, losing 0.5 percent against the dollar, on speculation the European Central Bank has finished raising interest rates as the region’s sovereign-debt crisis curbs economic growth. The ECB is scheduled to meet on interest rates Sept. 8.

“Risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September,” ECB President Jean-Claude Trichet told the European Parliament’s economic panel yesterday in Brussels. The comment contrasts with his more recent policy statement on Aug. 4, when he said risks to the inflation outlook were “on the upside.”

The yen appreciated 0.7 percent against the euro and 0.2 percent versus the dollar. The Dollar Index rose 0.4 percent. The New Zealand dollar strengthened versus all of its major peers after home-building permits rose 13 percent in July, the biggest jump since April 2008.

Oil, Copper

Oil jumped 1.9 percent to $88.90 a barrel in New York, climbing for a fourth straight day and reaching the highest level since Aug. 3. Oil advanced with gasoline and heating oil as East Coast refineries worked to restart after Hurricane Irene. An Energy Department report tomorrow may show U.S. crude inventories climbed 875,000 barrels last week.

Copper rose 0.8 percent to a three-week high. Corn futures increased for the fourth straight session, gaining 0.7 percent, after a government report showed U.S. crop conditions fell to the lowest since 2005 after adverse weather during the past two months. Rice climbed as much as 0.9 percent to its highest price for a most-active contract since October 2008.

The MSCI Emerging Markets Index rose 1 percent, headed for its largest three-day gain since Dec. 3. The Bombay Stock Exchange Sensitive Index advanced 1.6 percent and Poland’s WIG20 Index jumped 1.4 percent after reports showed the countries’ economies expanded more than forecast. Russia’s Micex Index climbed 0.1 percent.

--With assistance from Claudia Carpenter, Paul Dobson, Andrew Rummer, Michael Shanahan, Jason Webb and Stephen Kirkland in London, Shiyin Chen in Singapore, Steve Matthews in Atlanta and Cordell Eddings and Susanne Walker in New York. Editors: Jeff Sutherland, Stephen Kirkland

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Jeff Sutherland in New York at jsutherlan13@bloomberg.net

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


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