Bloomberg News

Dow Climbs to Highest Since July, Oil Surges on Manufacturing

January 09, 2012

Jan. 3 (Bloomberg) -- Stocks surged, driving the Dow Jones Industrial Average to the highest level since July, and commodities rallied on signs of increasing manufacturing output around the world. The dollar weakened and U.S. Treasuries fell.

The Dow increased 179.82 points, or 1.5 percent, to 12,397.38 and the S&P 500 jumped 1.6 percent to 1,277.06, the highest close since Oct. 28, at 4 p.m. in New York. The Stoxx Europe 600 Index added 1.6 percent and closed at a five-month high. The dollar slipped versus all 16 major peers, while 10- year Treasury yields increased seven basis points to 1.95 percent. Oil settled at an almost eight-month high near $103 a barrel as 23 of 24 commodities in the S&P GSCI Index rose.

Financial, industrial and commodity shares led the S&P 500’s gain as the Institute for Supply Management’s factory index expanded at the fastest pace in six months and government data showed construction spending grew at more than twice the forecast rate. Factory output in Australia grew for the first time in six months and reports in the past two days showed a pickup in Chinese and Indian manufacturing.

“You’re starting to see people want to take more risks,” Frank Ingarra, who helps manage the Can Slim Select Growth Fund at Greenwich, Connecticut-based NorthCoast Asset Management LLC, said in a telephone interview. His firm oversees $1.4 billion. “Manufacturing data has been pretty decent.”

New Year Rally

All 10 of the main industry groups in the S&P 500 advanced today except for utilities, which climbed 15 percent last year for the biggest gain. Financials, the worst-performing group in 2011 with an 18 percent drop, climbed 2.8 percent as a group today to help lead gains. Alcoa Inc., JPMorgan Chase & Co., Bank of America Corp., Chevron Corp. and Caterpillar Inc. rallied at least 3.7 percent as the Dow extend its 5.5 percent 2011 advance.

The ISM’s manufacturing index rose to 53.9 in December from 52.7 a month before, above the reading of 50 that signals growth and topping the 53.5 median projection of economists in a survey. Construction spending climbed 1.2 percent in November, Commerce Department data showed.

Forecasters at securities firms are more conservative on U.S. stocks than any time in seven years, predicting the S&P 500 will rise 6.4 percent to 1,338 in 2012 as budget deficits around the world limit gains. That’s the smallest predicted return since 2005. Adam Parker of Morgan Stanley, whose estimate for 2011 proved the most accurate among current analysts, forecast a loss of 7.2 percent as Europe’s debt crisis will keep volatility above historical levels.

Federal Reserve officials will for the first time make public their own forecasts for the federal funds rate at their Jan. 24-25 meeting, minutes from the December 13 Federal Open Market Committee said today. FOMC “participants decided to incorporate information about their projections of appropriate monetary policy” into their Summary of Economic Projections starting with their next meeting, the minutes said.

European Shares

The Stoxx 600 climbed to the highest level since August as the U.K.’s FTSE 100 Index and the Swiss Market Index, both of which were closed yesterday for a holiday, climbed more than 1.9 percent to lead gains in the region.

Rio Tinto Group led a rally in mining companies, gaining 6.4 percent. Afren Plc jumped 20 percent as the U.K. energy explorer focused on Africa said production topped its forecasts.

The MSCI All-Country World Index sank 9.4 percent last year, the most since 2008, as Europe’s debt crisis hurt global growth. The S&P 500 Index closed the year almost unchanged, slipping less than 0.1 percent, to beat benchmark indexes in all 24 developed markets except for Ireland, where the ISEQ Overall Index increased 0.6 percent.

Default Swaps Drop

A benchmark gauge of U.S. company credit risk dropped to the lowest level in two months. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 2.2 basis points to a mid-price of 118.09 basis points. The index fell as low as 117.6, the least since Oct. 31. Contracts on Bank of America Corp. and Goldman Sachs Group Inc. also fell.

The dollar weakened 0.9 percent today to $1.3051 per euro, which appreciated 0.6 percent against the yen after falling to an 11-year low yesterday. The yen weakened against 13 of its 16 most-traded peers monitored by Bloomberg, while the New Zealand dollar strengthened versus all but two of its major counterparts.

Moves by the Fed to flood the world with dollars are doing little to dent the currency’s value, bolstering the appeal of U.S. assets at a time when the government needs the support of foreign investors the most.

Dollar’s Share

The U.S. Dollar Index appreciated 13 percent from a record low in March 2008 through the end of 2011 even as the Fed kept interest rates at about zero and printed cash to buy $2.3 trillion of Treasury and mortgage-related bonds, and is little changed since 1991. The International Monetary Fund said Dec. 30 that the dollar’s share of global foreign-exchange reserves rose in the third quarter by the most since 2008.

The 30-year Treasury yield rose eight basis points to 2.98 percent today as improving economic data damped demand for the relative safety of U.S. government debt.

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs. Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.

European Bonds

The German 10-year bund yield slipped less than one basis point to 1.899 percent. Italian 10-year bond yields were little changed at at 6.92. Austrian bonds slid, driving the difference in yield with bunds nine basis points higher to 123 basis points. The French-German spread widened six basis points to 139 as France auctioned debt.

German unemployment fell more than forecast in December as exports of cars and machinery boomed and one of the mildest winters on record helped support jobs in construction. The number of people out of work fell by a seasonally adjusted 22,000 to 2.89 million and the adjusted jobless rate dropped to 6.8 percent.

Bank funding costs declined with the three-month cross- currency basis swap, the rate lenders pay to convert euro interest payments into dollars, slipping 10.5 basis points to 103.5 basis points below the euro interbank offered rate. That’s the lowest cost for dollar funding since Nov. 8, data compiled by Bloomberg show.

Oil Surges

Oil in New York jumped 4.2 percent to $102.96 a barrel, the highest settlement since May 11, as Iran’s Deputy Navy Commander Rear Admiral Mahmoud Mousavi told Press TV that any effort to harm the nation’s interests will lead to “reciprocal measures.” Copper advanced 2.7 percent to $3.5285 a pound in New York, a three-week high. All 24 commodities tracked by the S&P GSCI Index advanced except for Kansas wheat, sending the gauge up 3.4 percent for its biggest advance on a closing basis since May.

Speculators increased wagers on rising commodity prices by the most since August 2010 on signs that sustained economic growth will drive a rebound in raw materials from their first annual slump since the recession. Hedge funds and other money managers increased combined net-long positions across 18 U.S. futures and options by 18 percent to 536,907 contracts in the week ended Dec. 27, Commodity Futures Trading Commission data show.

The MSCI Emerging Markets Index rose 2.6 percent, the biggest advance in a month. The Hang Seng China Enterprises Index jumped 3 percent as trading resumed in Hong Kong. Benchmark indexes gained more than 2.4 percent in Brazil, Argentina, Russia, India and South Korea.

--With assistance from Claudia Carpenter, Namitha Jagadeesh, Abigail Moses, Andrew Rummer, Daniel Tilles and Jason Webb in London, Lynn Thomasson in Hong Kong and Debarati Roy, Liz Capo McCormick and Inyoung Hwang in New York. Editors: Michael P. Regan, Jeff Sutherland

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Ksenia Galouchko in New York at kgalouchko1@bloomberg.net

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


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