U.S. Stocks Rise, Bonds Erase Loss as Earnings Offset Fed
U.S. stocks rebounded from a two-day selloff as optimism over corporate earnings overshadowed central bank concerns that investors may be growing too complacent about the economic outlook. Treasuries erased losses, while gold advanced and oil and corn slumped.
The S&P 500 added 0.5 percent at 4 p.m. in New York, after slumping 1.1 percent over two days. The 10-year Treasury yield was little changed at 2.56 percent. The MSCI Emerging Markets Index fell for the first time in eight days. The yield on Portugal’s 10-year bond jumped 12 basis points to 3.76 percent. West Texas Intermediate oil dropped 1.1 percent and gold climbed 0.6 percent. Corn dropped below $4 a bushel for the first time in four years.
Alcoa (AA) advanced to the highest level since 2011 after reporting better-than-estimated profit and sales. Some Fed policy makers were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking, according to minutes of their June meeting. Portuguese bonds tumbled after a company linked to the nation’s second-biggest bank missed debt payments.
“We’re looking for continued economic growth, which will drive corporate earnings,” John Fox, director of research at Fenimore Asset Management in Cobleskill, New York, said in a phone interview. “There’s still money on the sideline. As long as earnings keep going up and stocks are fairly valued, the market can keep going.”
Fed officials expressed concern about low volatility in equity, currency and fixed-income markets. At the same time, “it was noted that monetary policy needed to continue to promote the favorable financial conditions required to support the economic expansion,” according to the minutes of the June 17-18 Federal Open Market Committee meeting.
The Chicago Board Options Exchange Volatility Index finished last week at a seven-year low before rallying 16 percent over the past two days, the most since April. The gauge known as the VIX (VIX) slipped 3 percent to 11.62 today.
Policy makers are debating the timing for the first increase in the main interest rate since 2006. Recent data from employment to housing is indicating the world’s largest economy is recovering after the worst contraction in gross domestic product since 2009, fueling speculation the Fed may begin raising rates sooner than estimated.
The Fed meeting took place before a June payrolls report that showed job growth blew past expectations and the unemployment rate fell to the lowest level since before the financial crisis peaked six years ago.
Fed Chair Janet Yellen said last month that accommodative monetary policy, rising property and equity prices and the improving global economy should lead to above-trend growth. She emphasized the need to put more Americans back to work and downplayed concerns about asset-price bubbles and incipient inflation.
U.S. government debt dropped earlier amid speculation the Fed would reveal discussion of plans for an exit from unprecedented monetary stimulus. The Treasury’s sale of $21 billion of 10-year securities attracted below-average demand. The U.S will sell $13 billion of 30-year bonds tomorrow.
“They have a dovish tone, even though we’re seeing a resumption of growth in the second quarter,” said Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York, which oversees $347.5 billion of bonds.
U.S. equities retreated a second day yesterday amid growing investor concern that stocks have rallied too fast after benchmark indexes ended last week at all-time highs. Equity losses were concentrated in technology shares and small-caps with high valuations. Raymond James & Associates Inc. said stocks are vulnerable to losses and Citigroup Inc.’s chief U.S. equity strategist cited concerns for a “severe” pullback.
The S&P 500 has not had a drop of 10 percent in more than two years. The gauge trades at a valuation of 18 times reported earnings, the highest since 2011 when it was in the middle of a 19 percent slide, its biggest during the current five-year bull market.
More than 130 companies in the S&P 500 (SPX) are scheduled to report quarterly results in the next two weeks, including Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs and Johnson & Johnson. Profit at S&P 500 companies probably rose 5 percent in the three months through June, while sales gained 3 percent, estimates compiled by Bloomberg show. The forecasts are lower than they were at the start of April, when analysts predicted a 7.3 percent rise in earnings and 3.7 percent sales increase.
Alcoa, which unofficially kicked off earnings season late yesterday, advanced 5.7 percent. The U.S. aluminum producer, which is shifting its focus to manufacturing auto and aerospace components, reported better-than-forecast profit on the strength of its traditional aluminum smelting business.
The Stoxx Europe 600 Index erased a loss of 0.4 percent to finish little changed, with trading volumes 4 percent more than the 30-day average, according to data compiled by Bloomberg. Portugal’s benchmark PSI 20 Index slid 2.1 percent.
Banque Privee Espirito Santo, a unit of Espirito Santo Financial Group SA, said yesterday there was a delay in payments on some short-term debt securities issued by Espirito Santo International.
“Reports about Espirito Santo are causing some trouble,” said Felix Herrmann, a research analyst at DZ Bank AG in Frankfurt. “We’re in the process of finding a new equilibrium for rates in the periphery. It seems like the process is going to be more volatile than previously thought. Liquidity is lower for Portuguese bonds and that makes them more vulnerable.”
Shares of Banco Espirito Santo SA, Portugal’s second-biggest bank by market value, sank 4.7 percent. Espirito Santo Financial Group fell 11 percent.
Portuguese 10-year yields rose as much as 26 basis points to 3.91 percent, the highest since May 21. Spain’s 10-year yield rose four basis points to 2.75 percent and Greece’s jumped seven basis points to 6.03 percent.
Greece hired banks to sell three-year debt, accessing international markets for the second time in three months, after European Central Bank stimulus measures fueled a rally in euro-area bonds this year.
The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong fell 1.6 percent and the Shanghai Composite Index slipped 1.2 percent.
West Texas Intermediate crude fell for a ninth day, the longest stretch of decreases since 2009, after supplies rose at Cushing, Oklahoma, the contract’s delivery point. Brent slipped 0.6 percent to a one-month low amid signs Libyan oil exports will gain.
Gold advanced 0.6 percent as increasing tension in the Middle East boosted the appeal of the metal as a haven.
Israel began a military offensive in the Gaza Strip this week by declaring its purpose was to halt Palestinian rocket attacks. The escalation in violence between Israel and Gaza-based militants is the worst since November 2012.
Corn futures fell 1.6 percent on bets that rain will boost yields for crops in the U.S., the world’s biggest grower. The grain entered a bear market last week. Soybeans lost 1.1 percent, extended the longest slump since 2009 with an eighth straight decline.