U.S. stocks erased gains as optimism about Federal Reserve plans to buy more bonds faded, with investor focus returning to the budget deadlock in Washington. The dollar pared losses; Treasury yields remained higher.
The Standard & Poor’s 500 Index closed up less than 0.1 percent at 1,428.48 at 4 p.m. in New York, reversing a gain of as much as 0.8 percent. The Dollar Index fell 0.2 percent after losing twice that amount earlier. Treasury 10-year yields increased five basis points to 1.70 percent and 30-year rates were six points higher at 2.9 percent amid bets that the Fed’s purchases will stoke inflation. Crude climbed for a second day after a five-session slump.
Stocks extended gains earlier as the Fed announced plans to buy $45 billion a month of Treasury securities starting in January, matching forecasts from economists in a Bloomberg poll. The rally faded as Fed Chairman Ben S. Bernanke held a press conference, telling reporters that monetary stimulus cannot offset the full effect of the so-called fiscal cliff of automatic tax increases and budget cuts set to go into effect next year if an alternative deal is not reached.
“The Fed has basically tried its very best to institute a backstop to downside economic risk borne from fiscal cliff,” Brian Sozzi, chief equities analyst at NBG Productions in New York, said in a note to clients that predicted the selloff during Bernanke’s press conference. “In turn, that may cause both sides of the aisle to re-play to their bases and in effect, ruin the feel-good vibes underlying this week’s rally.
The buying announced today will be in addition to $40 billion a month of mortgage-debt the Fed is currently buying. The FOMC said asset buying will continue ‘‘if the outlook for the labor market does not improve substantially.’’
The Fed said interest rates will stay low ‘‘at least as long’’ as the unemployment rate remains above 6.5 percent and if inflation ‘‘between one and two years ahead’’ is projected to be no more than 2.5 percent. The committee ‘‘views these thresholds as consistent with its earlier date-based guidance.’’
The Dow Jones Industrial Average erased an 81-point rally to close down 2.99 points at 13,245.45, with Wal-Mart Stores Inc., International Business Machines Corp. and 3M Co. leading losses. Eli Lilly & Co. sank 3.2 percent after saying it’s conducting an added study for an experimental Alzheimer’s drug.
Berkshire Hathaway Inc. climbed 2.4 percent after lifting the threshold it will pay for stock, signaling Chief Executive Officer Warren Buffett views the shares as undervalued. DuPont Co. advanced 1.4 percent as the chemical maker announced a share buyback and said 2012 earnings will be at the high end of forecasts.
The S&P 500 has advanced about 0.9 percent so far this month to give the benchmark index a 14 percent rally for 2012. Its average gain for December is 1.5 percent, the most of any month except July, according to data since 1928 compiled by Bloomberg. The stock market may also get a year-end boost from a so-called Santa Claus rally -- an upswing in the last five days of the year and the first two in January, according to the Stock Trader’s Almanac.
The S&P 500 will surpass its record to reach 1,580 at the end of next year, according to Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. His forecast is 0.9 percent higher than the benchmark equity measure’s all-time high of 1,565.15 and 11 percent above its closing level today. Stocks will rally as investors get clarity on political concerns in the U.S. and Europe, an acceleration in durable goods spending lifts price-earnings multiples and earnings growth picks up, according to New York-based Lee in a note dated today.
A Bloomberg National Poll shows President Barack Obama won the public argument over taxes and plans to protect Social Security and Medicare benefits. Obama is seeking a budget deal with Republican lawmakers to avert the fiscal cliff, which would result in more than $600 billion of automatic tax increases and spending cuts. Obama reduced his demand for tax increases to $1.4 trillion from $1.6 trillion as he and House Speaker John Boehner traded another round of offers.
Boehner told reporters today that Obama’s plan cannot pass the House or Senate and ‘‘we’ve got some serious differences” on the fiscal cliff. The S&P 500 fell as much as 5.3 percent after the Nov. 6 elections set up a budget showdown between Obama and House Republicans. The benchmark gauge has recovered all of that drop, even as Democrats and Republicans remain divided over how to cut the deficit.
“People don’t want to be in the wrong position the day when John Boehner and Barack Obama walk out of the White House with a deal,” David Kelly, chief market strategist at JPMorgan Funds in New York, said by phone. His firm oversees about $400 billion. “People are trying to position themselves the day after the deal rather than before the deal.”
In the bond market, 30-year yields reached a one-month high. Break-even rates on 30-year inflation-index bonds, a measure of expectations for consumer prices over the life of the securities, climbed to the highest since September.
The Stoxx Europe 600 Index gained for an eighth straight day, the longest streak in 19 months. PSA Peugeot Citroen surged 10 percent as Europe’s second-largest carmaker said it will eliminate an additional 1,500 jobs and La Tribune reported that Algeria may take a stake in company. Wacker Chemie AG, the second-biggest maker of solar-grade silicon, rose 12 percent after China’s government announced a subsidy plan for photovoltaic projects.
Euro-area industrial production unexpectedly fell in October as declines in Germany and France offset gains in Spain and Portugal. Output in the 17-nation euro area dropped 1.4 percent from September, when it declined 2.3 percent, the European Union’s statistics office said. Economists had forecast no change in October, according to the median of 34 estimates in a survey. Output fell 3.6 percent from the year-earlier month.
The dollar weakened against 13 of 16 major peers, losing the most versus the Swiss franc, the euro and New Zealand dollar.
The yen weakened at least 0.6 percent against all 16 major peers, losing 1.3 percent to 108.69 per euro. The Japanese currency fell to the weakest in eight months versus the dollar as Japan’s Liberal Democratic Party, which has pledged fiscal stimulus to stoke economic growth, leads in polls before Dec. 16 elections.
South Korea’s currency was 0.1 percent stronger at 1,074.93 per dollar in Seoul. It touched 1,073.64, the strongest level since September 2011, before temporarily reversing gains after North Korea confirmed it launched a rocket that put a satellite into orbit, showcasing the totalitarian regime’s progress in ballistic missile technology. The launch came a week before the South’s presidential election.
Greek bonds rose, with the 10-year yield down six basis points at 13.15 percent. Greece drew enough offers for its buyback of securities to meet a goal that’s crucial to unlocking aid from the International Monetary Fund and European Union.
Cocoa rallied 2.6 percent and hogs, silver and heating oil increased at least 1.4 percent to lead gains in 15 of 24 commodities tracked by the S&P GSCI. Gold for February delivery increased 0.5 percent to $1,717.90 an ounce.
New York-traded crude increased 1.1 percent to $86.77 a barrel. The International Energy Agency raised fourth quarter and 2013 consumption estimates on signs of a demand rebound in China, the world’s second-largest oil user.
The MSCI Emerging Markets Index rallied 0.8 percent, rising for a sixth straight day to reach its highest level since April. Benchmark indexes in Taiwan, Russia and Argentina climbed at least 1 percent to lead gains in developing nations.
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