Bloomberg News

U.S. Stocks Pare Drop as Investors Dissect Fed Minutes

July 11, 2012

Stocks Pare Drop

Traders work on the floor of the New York Stock Exchange. Photographer: Scott Eells/Bloomberg

U.S. stocks pared losses in the final half hour of trading as investors debated whether the Federal Reserve will embark on another economic stimulus program. The Dollar Index touched a two-year high while commodities gained and Treasuries were little changed.

The Standard & Poor’s 500 Index slipped less than 0.1 percent to 1,341.45 at 4 p.m. in New York, paring a drop of 0.6 percent. The Dollar Index, a gauge of the currency against six major peers, rose as much as 0.3 percent to 83.61 before paring its gain to 0.1 percent. The S&P GSCI Index of commodities added 1.1 percent as oil rose following a drop in U.S. supplies. Gold lost 0.5 percent. Ten-year Treasury yields rose one basis point to 1.51 percent after approaching a record low.

Stocks slid and the dollar rose as Fed minutes showed two participants said more bond purchases are appropriate, while two others said they would be needed in the absence of “satisfactory progress” in cutting unemployment or if downside risks grew. Equities recovered as analysts dissected the minutes, with Jefferies & Co. economist Ward McCarthy saying in a note there’s a “reasonable probability” a third round of quantitative easing is announced in coming months.

“What often happens is when the market is looking for something positive and doesn’t get it, it will read into the notes and see what the implication of the Fed’s posture is and the posture is clearly more toward an accommodation than it was a month ago,” said Peter Kenny, managing director in institutional sales at Knight Capital Group Inc. in Jersey City, New Jersey.

‘Cheerleading’

The minutes from the June meeting also show policy makers considered the risk that further easing might pose. Some central bankers noted that excessive purchase of Treasuries may lead to deterioration in the functioning of the Treasury market. UBS AG economist Drew Matus wrote in a client note that the language in the Fed minutes indicates the threshold for a third round of quantitative easing is high and should not be taken as a given.

“There is not much cheerleading in these minutes,” Mike Shea, a managing partner at New York-based brokerage firm Direct Access Partners LLC, said in an interview. “We see a lot of discussion on what the real benefits of more stimulus would be, and it appears there is a conclusion that benefits would be modest.”

The Fed minutes come amid growing concern that the U.S. economic recovery is faltering and corporate profits are shrinking. Goldman Sachs Group Inc. cut its estimate for second- quarter U.S. gross-domestic product growth twice today, lowering it to 1.3 percent after data on wholesale inventories and the trade deficit dimmed prospects for the economy.

Earnings Season

Earnings at S&P 500 companies decreased 1.8 percent in the second quarter, according to analyst estimates compiled by Bloomberg. That would mark the first year-over-year decline since 2009.

Technology shares in the S&P 500 slipped 0.6 percent as a group and were the biggest drag on the index for a second day. The group lost 1.2 percent yesterday as reduced sales projections at Advanced Micro Devices Inc. and Applied Materials Inc. (AMAT:US) spurred concern about profits at technology companies, the group forecast to have the strongest second-quarter earnings growth among 10 industries.

Five-Day Slump

The S&P 500 has slipped for five straight days, the longest slump in almost two months. United Technologies Corp., Boeing Co. and Microsoft Corp. lost at least 1.5 percent to lead declines in 21 of 30 stocks in the Dow Jones Industrial Average (INDU), which fell 48.59 points to 12,604.53. Exxon Mobil Corp. and Chevron Corp. rose at least 0.9 percent as energy shares had the biggest advance in the S&P 500, while Bank of America Corp. rose 2 percent to pace an advance in banks.

Last’s month Fed meeting came before a report July 6 that showed U.S. employers added fewer workers than forecast in June and growth in private payrolls was the slowest in 10 months.

The Dollar Index reversed a decline of as much as 0.4 percent. The U.S. currency strengthened against nine of its 16 major peers, rising the most against the South African rand, Swedish krona and Japanese yen.

Almost two shares fell for each that gained in the Stoxx Europe 600. (SXXP) Burberry Group Plc tumbled 7.4 percent after the U.K.’s largest luxury-goods company reported sales that missed estimates. Britvic Plc plunged 13 percent after the maker of Robinsons fruit drinks said full-year results will be at the bottom end of analysts’ estimates. Bankia SA, the nationalized Spanish lender, tumbled 7.8 percent.

Spain Rally

Spain’s IBEX 35 Index of stocks rallied 1.2 percent and its bonds surged for a second day after Prime Minister Mariano Rajoy said the government will take more measures amounting to 65 billion euros ($79.9 billion) to shore up the budget.

The prime minister announced cuts in jobless benefits and public wages, signaled reductions in pensions and raised sales taxes as part of a 65 billion-euro ($80 billion) package of deficit cuts, risking a deeper recession. As striking miners clamored for aid to keep their industry alive in a march along Madrid’s main boulevard, Rajoy trimmed union funding by 20 percent.

The yield on Spain’s 10-year bond fell 23 basis points to 6.58 percent, while the rate on similar-maturity Italian securities slipped 14 basis points to 5.81 percent.

The yield on 10-year German bunds decreased five basis points to 1.27 percent as the government sold 4.15 billion euros of the securities at a record-low yield of 1.31 percent. Two- year German yields were minus 0.016 percent.

Corn Reverses

Corn fell 2.2 percent to $7.015 a bushel, retreating from a 10-month high on speculation that a drought-fueled rally in prices will curb demand. Earlier, the grain reached $7.48, the highest for the most-active contract since Sept. 13. Today, the USDA cut its domestic production estimate by 12 percent a month after predicting a record harvest. The U.S. is the world’s largest grower and exporter.

Corn prices through yesterday surged 42 percent since mid- June as areas of moderate to extreme drought expanded to 53 percent of the Midwest. Crop conditions as of July 8 were the worst for that date since the drought of 1988, government data show.

Oil in New York rose 2.3 percent to $85.81 a barrel today after the U.S. Energy Department reported supplies dropped and refineries operated at the highest rate in almost five years.

The MSCI Emerging Markets Index fell 0.2 percent, retreating for a sixth day in the longest run of declines since May. Russia’s Micex Index lost 1.3 percent and India’s Sensex slipped 0.7 percent. The Shanghai Composite Index rose 0.5 percent. The Turkish lira strengthened against 13 of 16 major peers after the current-account deficit narrowed.

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net


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Companies Mentioned

  • AMAT
    (Applied Materials Inc)
    • $21.19 USD
    • -0.17
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