Bloomberg News

U.S. Stocks Fall, Dollar, Treasuries Gain as Fed Damps QE3 Bets

December 19, 2011

Dec. 13 (Bloomberg) -- U.S. stocks fell, while the dollar and Treasuries rallied, as the Federal Reserve refrained from taking more steps to stimulate the economy and concern grew that European leaders won’t agree on ways to expand the region’s bailout capacities. Gold slumped to a seven-week low.

The Standard & Poor’s 500 Index lost 0.9 percent to 1,225.73 at 4 p.m. in New York, wiping out a gain of as much as 1.1 percent. The Dollar Index rose 1 percent, topping 80 for the first time since January, as the euro fell on reports that German Chancellor Angela Merkel rejected boosting Europe’s permanent bailout fund. Ten-year Treasury yields slipped five basis points to 1.97 percent following stronger-than-average demand at an auction. The S&P GSCI Index of commodities rose 1.5 percent after surging as much as 2.3 percent.

Stocks headed lower as Fed policy makers said the U.S. is maintaining growth even as the global economy slows and defied speculation from some investors that the central bank would signal plans for a third round of large-scale asset purchases known as quantitative easing, or QE3. The Fed said it would continue its exchange of $400 billion of short-term debt with long-term securities to lengthen the average maturity of its holdings, a move dubbed Operation Twist.

“Operation Twist remains in effect but there was no mention of a QE3, or further coordinated action with the ECB, which may have disappointed investors,” Mark Bronzo, who helps manage $23.5 billion at Security Global Investors in Irvington, New York, said in an e-mail, referring to coordinated action with the European Central Bank.

Gains Erased

Earlier gains in stocks were triggered as German investor confidence unexpectedly grew and Spain sold more debt than planned at an auction.

Financial shares erased earlier gains after the Fed’s statement, sending the 80 banks, insurers and investment firms in the S&P 500 down 1.5 percent as a group. Goldman Sachs Group Inc. sank 3.1 percent to help lead losses in the group.

Retailers were the biggest drag on the S&P 500 among 24 industries after the government reported sales rose in November at the slowest pace in five months. The 0.2 percent gain trailed the median economist projection for a 0.6 percent increase. Best Buy Co. decreased 15 percent, the most in nine years, after the largest consumer-electronics retailer reported third-quarter profit that trailed analyst estimates, hurt by Black Friday promotional costs.

Treasury Auction

Treasuries reversed losses after the U.S. sale of $21 billion in 10-year notes. The securities drew a yield of 2.020 percent, compared with a forecast of 2.050 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 3.53, the strongest level since April 2010.

Thirty-year Treasury yields lost five basis points to 3.00 percent, while two-year rates were little changed at 0.23 percent.

“I think people were short the back end of the curve, the 10- and 30-year point,” James Caron, head of U.S. interest rate strategy at Morgan Stanley, told Bloomberg Television. “And given that the Fed didn’t really have anything new in its communication, it actually caused people to short-cover and that caused the curve to flatten.”

The Fed’s statement reiterated a warning at two previous meetings that “Strains in global financial markets continue to pose significant downside risks to the economic outlook.” Fed Chairman Ben S. Bernanke said last month that the sentence refers to the European debt crisis.

‘Exceptionally Low’

The Fed left unchanged its statement that economic conditions are likely to warrant “exceptionally low” interest rates “at least through mid-2013.” The central bank lowered its target overnight interest rate to a range of zero to 0.25 percent in December 2008.

Cocoa, gasoline and oil jumped more than 2 percent to lead gains in 15 of 24 commodities tracked by the S&P GSCI gauge. Gold futures for February delivery dropped 2 percent to $1,635.20 an ounce in electronic trading on the Comex in New York. At the close of floor trading, the price was down 0.3 percent to settle at $1,663.10. The metal touched $1,634 today, the lowest since Oct. 21.

Crude settled up 2.4 percent at $100.14 a barrel and advanced as much as 3.6 percent after the state-run Fars news agency reported the Iranian military drills to close the Strait of Hormuz will be “soon,” citing Parvis Sorouri, a member of the parliament’s national security and foreign policy committee. The strait is a bottleneck for oil exports from the Persian Gulf.

European Shares

The Stoxx Europe 600 Index rose 0.5 percent, paring a gain of as much as 1.2 percent. Gauges of energy and mining stocks led gains among 19 industry groups, jumping more than 1.5 percent. Lagardere SCA, France’s biggest publisher, rose 3.3 percent after Deutsche Bank AG upgraded the shares. Royal Dutch Shell Plc and BP Plc gained more than 1.7 percent. Declines in banks and insurers limited gains on the Stoxx 600 with Banco Santander SA and BNP Paribas SA, the largest lenders in Spain and France, respectively, dropping at least 1.5 percent.

The ZEW Center’s confidence index increased to minus 53.8 in December from a three-year low of minus 55.2 the previous month. The gauge was forecast to drop to minus 55.8, according to the median of 34 estimates in Bloomberg survey of economists. Its index of current conditions fell to 26.8 from 34.2 in November, compared with a reading of 31 in a Bloomberg survey.

European Bond Yields

The yield on Spain’s 10-year note slipped eight basis points to 5.71 percent after climbing earlier. The government sold 12-month debt at an average yield of 4.050 percent, compared with 5.022 percent at an auction on Nov. 15, and 18- month bills at 4.226 percent, down from 5.159 percent last month.

The two-year Italian note’s yield slipped 18 basis points and the nation’s 10-year yield rose 12 basis points to 6.69 percent after climbing as much as 19 basis points.

The European Financial Stability Facility, the region’s temporary bailout fund, sold 1.97 billion euros of 91-day bills at an average yield of 0.2222 percent, the Bundesbank said. Investors bid for 3.2 times the amount sold, according to data from the central bank.

The 17-nation euro currency dropped against 13 of its 16 major counterparts after Merkel told German coalition lawmakers that the 500 billion euro ($654 billion) cap on Europe’s planned permanent bailout fund will stay in place, two officials with knowledge of the discussion said.

The MSCI Emerging Markets Index fell 1.1 percent, the lowest on a closing basis since Nov. 29. South Korea’s Kospi Index sank 1.9 percent after Morgan Stanley cut its rating for the nation’s equities to “equal-weight” from “overweight.” The Shanghai Composite Index dropped 1.9 percent to a more than two-year low.

--With assistance from Mark Gilbert, Andrew Rummer, Michael Shanahan, Daniel Tilles, Stuart Wallace, Jason Webb and Stephen Kirkland in London, Ayesha Daya in Dubai, Lynn Thomasson in Hong Kong, Catarina Saraiva, Cordell Eddings, Susanne Walker and Mark Shenk in New York and Scott Lanman and Joshua Zumbrun in Washington. Editors: Michael P. Regan, Jeff Sutherland

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

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


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