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Stocks Rebound From Slump as Pound Slides on Moody’s Cut

By Andrew Rummer and Nikolaj Gammeltoft
February 22, 2013 4:46 PM EST 4 Comments
Equities Rebound on German Business Confidence as Euro Weakens
Equities Rebound on German Business Confidence as Euro Weakens

Global stocks rebounded from the worst slump since November as German business confidence rose more than forecast. Treasuries rose for a third day. The pound slid following the close of markets in New York after the U.K. government lost its Aaa rating from Moody’s Investors Service.

The MSCI All-Country World Index (MXWD) climbed 0.6 percent after sinking 1.8 percent in the previous two days amid concern the Federal Reserve will scale back stimulus. The Standard & Poor’s 500 Index added 0.9 percent, the most in two weeks, and Germany’s DAX Index jumped 1 percent. The S&P GSCI Index of 24 raw materials halted a four-day slump as nickel and gasoline led gains. The pound slipped 0.4 percent to $1.5197. The dollar weakened against 10 of 16 major peers; the euro fell versus 14.

German business confidence increased to a 10-month high in February, adding to signs that Europe’s largest economy is gathering strength. In the U.S., American International Group Inc. (AIG) and Hewlett-Packard (HPQ) Co. helped lead gains in stocks after reporting quarterly results that beat analysts’ estimates. The S&P 500 trimmed its first weekly decline of the year.

“A lot of people have been looking for pullbacks in the market to put money at work in equities,” said Brian Amidei, a Palm Desert, California-based managing director at HighTower Advisors. His firm manages about $25 billion. “The market got a lift from fourth quarter earnings, it will do well this year but we will have some volatility in between as we’re starting to see now.”

‘Too Far’

The MSCI All-Country World Index of equities still capped a third week of declines, the longest slump since May. China’s government told local authorities to curb real-estate speculation, euro-area services and manufacturing shrank in February and concern grew that the U.S. may curtail stimulus. Italy’s parliamentary election starts on Sunday.

“The market got a little too far, too fast,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which oversees $55 billion, said on Bloomberg Television’s “First Up” with Susan Li. “But at the same time improving economic fundamentals over the course of 2013 and a profit picture that came through earnings looking a little better than what was expected all bode well for stock prices to continue to advance.”

The S&P 500 rebounded from a two-day, 1.9 percent drop, its worst since Nov. 8. Hewlett-Packard, the largest personal- computer maker, rallied 12 percent for its biggest gain since 2008 after the company’s forecast for fiscal second-quarter profit also exceeded analyst estimates and Chief Executive Officer Meg Whitman reaffirmed a prediction that the company will resume growth next year.

AIG Climbs

American International Group Inc., the insurer that repaid a U.S. bailout, gained 3.1 percent after reporting an unexpected operating profit. AIG plans to rebuild life insurance sales outside the U.S. after selling operations in Asia and Europe to help repay its bailout, Chief Executive Officer Robert Benmosche said.

AIG replaced Apple Inc. as the top-held stock among hedge funds in the fourth quarter, according to a report from Goldman Sachs Group Inc., as hedge funds became more bullish on equities than they have been in six years. Net long exposure to stocks in hedge funds climbed to 52 percent in the fourth quarter, matching the 10-year high reached in the first quarter of 2007, a team led by Goldman Sachs’ Amanda Sneider and David Kostin said in a Feb. 20 report.

Bernanke, Bubbles

Fed Chairman Ben S. Bernanke minimized concerns that the central bank’s easy monetary policy has spawned economically- risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions. The people, who asked not to be identified because the talks were private, said Bernanke made the remarks at a meeting in early February with the Treasury Borrowing Advisory Committee. Fed spokeswoman Michelle Smith declined to comment.

The Fed chairman brushed off the risks of asset bubbles in response to a presentation on the subject from the group, one person said. Among the concerns raised, according to this person, were rising farmland prices and the growth of mortgage real estate investment trusts. Falling yields on speculative- grade bonds also were mentioned as a potential concern, two people said.

“The way we look at it, this may well be sowing the seeds of a bubble in the asset markets,” Larry Kantor, the New York- based head of research at Barclays Plc, said in a radio interview with Tom Keene on “Bloomberg Surveillance.” “Every cycle has its own idiosyncrasies and new things. The new thing this time is central banks buying assets, really circumventing the banking system. This whole idea of massive expansion of central bank balance sheets is the new thing.”

Yields on 10-year U.S. Treasuries declined one basis point to 1.97 percent, while two-year rates were little changed at 0.25 percent.

European Markets

The pound weakened against all 16 major peers, with the currencies of Australia and New Zealand leading gains. The U.K.’s domestic- and foreign-currency government bond ratings were cut by one level to Aa1 from Aaa by Moody’s, which cited continued weakness in the nation’s growth.

About five shares gained for each that fell in the Stoxx Europe 600 Index (SXXP), sending the regional benchmark up 1.3 percent after yesterday’s 1.5 percent plunge. Elan Corp. climbed 4.2 percent in Dublin as the drugmaker said it plans to buy back $1 billion of stock after selling its stake in the Tysabri multiple sclerosis treatment to Biogen Idec Inc. (BIIB) Fuchs Petrolub AG (FPE) rose 5.9 percent as the German lubricant maker reported earnings that beat projections.

German Confidence

The Ifo institute in Munich said its business climate index advanced to 107.4 this month from 104.3 in January. Economists had predicted a reading of 104.9, according to the median of 38 forecasts in a Bloomberg survey.

“Germany is the anchor of Europe,” Tobias Britsch, who helps manage about $34 billion as European equities asset manager at Meriten Investment Management GmbH, said by phone from Dusseldorf, Germany. “After yesterday, when you saw investors getting more nervous and all blame was on Italian elections and on the suggestion the Fed may stop asset purchases, any pullback is definitely an opportunity to buy.”

Euro Economy

Even so, the European Commission downgraded its outlook for the euro-area economy today. Gross domestic product in the 17- nation region will shrink 0.3 percent this year, compared with a November prediction of 0.1 percent growth, the Brussels-based commission forecast.

The European Central Bank said financial institutions will return 61.1 billion euros ($80.5 billion) of its second loan program next week, half the amount estimated by economists.

The MSCI Emerging Markets Index (MXEF) was little changed after the gauge’s biggest drop in seven months yesterday erased this year’s gains. The Shanghai Composite Index retreated 0.5 percent, capping its worst week in 20 months.

Commodities advanced for the first time in five days, after the S&P GSCI gauge fell 1.6 percent yesterday, the most since November. Nickel climbed 2 percent as the relative strength index slipped to 30 yesterday, the level that indicates to some analysts who study technical charts that a rebound in prices may be imminent.

‘Dramatic Fall’

Oil futures for April delivery added 0.3 percent to $93.13 a barrel in New York, after slumping about 4 percent during the prior two days.

The euro erased an earlier gain of as much as 0.4 percent against the dollar. Some 356 financial institutions will hand back 61.1 billion euros of ECB loans on Feb. 27, the first opportunity for early repayment of the second Longer Term Refinancing Operations, the central bank said. The median forecast of economists in a Bloomberg News survey was for 122.5 billion euros to be repaid.

In addition, nine banks will return 1.7 billion euros borrowed in the first three-year LTRO. That takes the total amount of funds repaid early to 212.3 billion euros. The ECB flooded financial markets with more than 1 trillion euros in three-year loans a year ago after banks stopped lending to each other because of Europe’s debt crisis.

Australia’s dollar climbed 0.8 percent to $1.0331. Glenn Stevens, governor of the Reserve Bank of Australia, said interest-rate reductions are working. He endorsed the current level of rates today and said he’d need to be confident the currency is “seriously overvalued” before considering intervention to weaken it. New Zealand’s currency advanced 0.5 percent to 83.79 U.S. cents after a report showed credit card spending rose for a third-straight month in January.

To contact the reporters on this story: Andrew Rummer in London at arummer@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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