Bloomberg News

Stocks Rally, Euro Strengthens as Europe Pledges Debt Resolution

October 10, 2011

Oct. 10 (Bloomberg) -- Stocks rose, giving the Standard & Poor’s Index its biggest gain since Aug. 23, and the euro surged the most since July 2010 versus the dollar after the leaders of France and Germany pledged to deliver a plan to stem the debt crisis. Commodities advanced for a fourth day.

The S&P 500 jumped 3.4 percent and the Dow Jones Industrial Average added 330.06 points to 11,433.18 at 4 p.m. New York time. The Stoxx Europe 600 Index climbed 1.7 percent to cap a four-day rally of 8.5 percent, its largest over that stretch of time since November 2008. The 17-nation euro currency appreciated 2 percent versus the dollar as it strengthened against 10 of 16 major peers. The S&P GSCI gauge of raw materials increased 2.1 percent. Costs to protect against a European sovereign default decreased.

The S&P 500 has rebounded 8.7 percent since Oct. 3, the most over the same amount of time since March 2009, on optimism European leaders will succeed in taming the debt crisis and as U.S. economic data beat estimates. German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday they will deliver a plan to recapitalize European banks and address the Greek debt crisis by Nov. 3. Reports this week may show U.S. retail sales increased in September at the fastest pace in six months, adding to evidence that growth is rebounding.

“It’s a risk-on day,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview. “Is it a relief rally? Yes, in some ways,” he said. “While a Greece default is not something that can really be addressed or avoided, the consequences on the banking system can be avoided.”

Financials, Energy

The S&P 500 added to last week’s 2.1 percent advance and climbed above its highest closing level since Sept. 20. Gauges of financial, commodity and energy companies rose more than 4 percent for the biggest gains among 10 industries.

Citigroup Inc. and Bank of America Corp. rallied more than 6 percent to lead gains in all 24 stocks in the KBW Bank Index. Freeport-McMoRan Copper & Gold Inc. and ConocoPhillips climbed more than 4 percent as commodities rallied.

The Federal Reserve will release the minutes of its latest interest-rate setting meeting tomorrow. Data this week may show U.S. retail sales increased in September at the fastest pace in six months, helping to ease concern the recovery is faltering. The 0.7 percent rise in September retail sales anticipated by economists in a Bloomberg survey follows better-than-expected jobs figures reported last week, a rebound in construction spending in August and an acceleration in manufacturing in September.

Earnings Season

Earnings per share for the S&P 500, excluding financial companies, are forecast to have increased 14 percent in the third quarter, the smallest gain since the end of 2009, analysts’ estimates compiled by Bloomberg show. Alcoa Inc., the biggest U.S. aluminum producer, will report earnings tomorrow after U.S. markets close, the first member of the Dow Jones Industrial Average to release third-quarter results.

It’s time to “extend risk,” Jonathan Golub, chief U.S. market strategist at UBS AG, wrote in a note to clients today. “As macro concerns subside, we believe that the stocks which have experienced the greatest price declines are likely to snap back the quickest.”

Golub said industrial, raw material and energy shares are the most attractively valued. As the S&P 500 retreated from a three-year high at the end of April, those industries slid more than 21 percent through Oct. 7. The benchmark gauge slumped 15 percent during the same period.

‘Everything Necessary’

The euro traded at $1.3649 after Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. The shared currency weakened on Oct. 7 after Fitch Ratings lowered Spain’s foreign and local debt to AA- from AA+ and cut Italy’s to A+ from AA-, citing an “intensification” of the region’s crisis.

Automobile and chemical companies led gains in the Stoxx 600. Energy producers rose after HSBC Holdings Plc upgraded Premier Oil Plc, with BP Plc climbing 2.9 percent to contribute the most to the gauge’s advance. Erste Group Bank AG tumbled 9.2 percent after saying it will post a full-year loss of as much as 800 million euros because of writedowns at its Hungarian and Romanian units. Ferrovial SA jumped 6.5 percent after agreeing to reduce its indirect holding in BAA Ltd., which owns London’s Heathrow airport.

Dexia Breakup

Belgium said today it will buy part of Dexia SA and provide security for depositors as part of a plan to rescue the lender. Dexia lost 4.7 percent after sliding as much as 36 percent.

Belgium’s purchase of the local consumer-lending unit of Dexia will end a 15-year cross-border experiment with France after the European debt crisis deepened. The Belgian federal government will pay 4 billion euros ($5.4 billion) for the division and guarantee 60 percent of a so-called bad bank to be set up for Dexia’s troubled assets, Finance Minister Didier Reynders said at a press conference today.

Credit-default swaps on Belgium rose four basis points to 287, while the Markit iTraxx SovX Western Europe Index of swaps linked to 15 governments was 8.2 basis points lower at 323. Contracts on France were down five points at 172 and Germany’s decreased three points to 95, according to CMA. Decreases signal improving perceptions of credit quality.

Greek, Belgian Bonds

The yield on the Greek 10-year bond advanced 38 basis points, driving the premium investors demand to hold the securities instead of benchmark German bunds 30 basis points higher to 21.83 percentage points. Belgian 10-year bond yields rose nine basis points, with similar-maturity French yields 11 points higher. Portuguese and Italian 10-year debt also declined. U.S. Treasuries aren’t trading today because of the Columbus Day holiday.

The Swiss franc gained against all 16 of its most-traded peers, rising 2.6 percent versus the dollar. The dollar weakened against all 16 major counterparts and the Dollar Index, which tracks the currency against six major peers, fell 1.5 percent to 77.55 for its biggest drop since July 1, 2010. Australia’s dollar climbed 2.2 percent against its U.S. peer, rising for the fifth straight day.

Oil advanced for a fourth day, gaining 2.9 percent to $85.41 a barrel in New York. Silver jumped 3.2 percent to $31.98 an ounce. Gold for December delivery added 2.1 percent to $1,670.80 an ounce.

Emerging Markets

The MSCI Emerging Markets Index rose 1.6 percent for a fourth consecutive advance, its longest winning streak since Sept. 1. The Bombay Stock Exchange Sensitive Index, or Sensex, jumped 2 percent. The WIG20 Index gained 3.4 percent after Prime Minister Donald Tusk won yesterday’s Polish general election. The EGX30 Index slid 2.3 percent in Egypt after Coptic Christian protesters clashed with security forces in Cairo yesterday.

China’s yuan advanced 0.6 percent to 6.3486 per dollar in Shanghai, the most since the currency’s July 2005 revaluation, on speculation policy makers will tolerate gains after the U.S. said the Asian nation undervalues its currency. It was the strongest closing level since the country unified the official and market exchange rates at the end of 1993, according to the China Foreign Exchange Trade System.

--With assistance from Michael Shanahan, Claudia Carpenter, Daniel Tilles and Jason Webb in London and Shiyin Chen in Singapore. Editors: Michael P. Regan, Nick Baker

To contact the reporters on this story: Stuart Wallace in London at swallace6@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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