Dow Climbs to Highest Since Lehman, 30-Year Bond Slides on Fed
Nov. 3 (Bloomberg) -- Al Broaddus, former president of the Federal Reserve Bank of Richmond, Diane Swonk, chief economist at Mesirow Financial Inc., and John Richards, head of strategy for the Americas at RBS Securities Inc., talk about the Federal Reserve's plan to buy an additional $600 billion of Treasuries through June in a bid to reduce unemployment and avert deflation. The central bank kept its pledge to keep interest rates low for an “extended period.” They talk with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (This report is an excerpt from the full interview. Source: Bloomberg)
Nov. 3 (Bloomberg) -- Joseph Stiglitz, an economics professor at Columbia University, and Marvin Goodfriend, an economics professor at Carnegie Mellon University, discuss Federal Reserve policy and the economy. They talk with Tom Keene on Bloomberg Televisions "Surveillance Midday." (Source: Bloomberg)
The Dow Jones Industrial Average climbed to a two-year high while Treasury 30-year bonds slid and the dollar fell as the Federal Reserve planned to expand asset purchases by an additional $600 billion to shore up the economy.
The Dow rose 26.41 points, or 0.2 percent, to 11,215.13 at 4 p.m. in New York, the highest since the week Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008. The Standard & Poor’s 500 Index gained 0.4 percent to a six-month high of 1,197.96. The 30-year Treasury yield surged 0.12 percentage point, the most in two months, to 4.05 percent. The Dollar Index, which tracks trading versus six major peers, lost 0.5 percent. Oil reached a six-month high of $84.69 a barrel.
The S&P 500 has rallied 14 percent and the dollar has slumped at least 3.6 percent against 16 major peers since Fed Chairman Ben S. Bernanke indicated in August that he may inject more cash into the world’s largest economy. The Fed said today its purchases will be about $75 billion a month. The central bank will also reinvest as much as $300 billion in proceeds from agency and mortgage debt it holds. Most of the purchases will be of Treasuries due in 10 years or less.
“The bond market is seeing a bigger reaction given that people were expecting that more buybacks would be concentrated in the long-end of the curve,” said Paul Zemsky, the New York- based head of asset allocation for ING Investment Management, which oversees $550 billion. “Nothing in here tells me that we should be selling stocks.”
Bernanke’s Plan
Bernanke is trying to boost growth after near-zero interest rates and $1.7 trillion in securities purchases helped pull the economy out of recession without bringing down joblessness close to a 26-year high.
A statement from the Fed Bank of New York today said that including as much as $300 billion of reinvested proceeds from debt holdings, the central bank will buy a total of $850 billion to $900 billion of Treasuries by the end of the second quarter. Eighty percent of the purchases will target bonds coming due in 2 1/2 to 10 years.
Ten-year Treasury yields slipped two basis points to 2.58 percent after the statement. Two-year yields decreased less than two basis point to 0.33 percent.
“I would like to see the Federal Reserve articulate step- by-step what adding $600 billion in additional securities to their balance sheet, what it accomplishes and how,” Michael Aronstein, president of Marketfield Asset Management, said during a Bloomberg Television interview on “Street Smart” with Carol Massar and Matt Miller. “I understand what they did in the fourth quarter of 2008, which saved the global economy from a real meltdown, but as far as incrementally adding reserves at this point, I’m just not certain how that works.”
Earnings, Election
Stocks have also rallied since the end of August amid improving earnings and speculation yesterday’s election would produce a divided Congress that won’t pass further business reforms.
Republicans gained at least 60 House seats yesterday across the country, capitalizing on concern that government spending has increased over the last two years and delivering a rebuke to the domestic agenda of President Barack Obama.
The S&P 500 may rally as much as 16 percent in the next six months because the election will stymie legislative initiatives in Congress, billionaire investor Kenneth Fisher said.
‘Big, Sweeping Actions’
“Markets don’t like big sweeping actions,” said Fisher, who oversees more than $38 billion at Woodside, California-based Fisher Investments Inc. “Right now, every politician is chirping and burping and carrying on. It’s been in the interest of the Republicans running for office to talk down the economy. That goes away immediately after the election.”
Reports today showed higher-than-estimated growth in U.S. service industries and private job growth.
The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, rose to 54.3 in October from 53.2 a month earlier. The median forecast of 76 economists surveyed by Bloomberg News projected the ISM index would rise to 53.5.
Data from ADP Employer Services showed employment increased by 43,000 last month, above the median estimate of a 20,000 gain from 38 economists surveyed by Bloomberg News. The government jobs report in two days is forecast to show the unemployment rate held steady at 9.6 percent in October as the economy added 60,000 jobs.
Dow Leaders
Cisco Systems Inc., Hewlett-Packard Co. and JPMorgan Chase & Co. rose at least 2 percent to lead gains in 21 of 30 stocks in the Dow.
Hartford Financial Services Group Inc. rallied 9.2 percent today after the insurer reported its biggest profit since 2007 on investment gains. BlackRock Inc., the world’s largest money manager, tumbled 4.3 percent after saying Bank of America Corp. and PNC Financial Services Group Inc. may reduce their stakes in the company. EOG Resources Inc. declined 9.3 percent after the energy producer cut its production forecast.
Earnings have topped analysts’ estimates at 78 percent of the 369 companies in the S&P 500 that have reported results since Oct. 7, according to data compiled by Bloomberg. Net income has grown 33 percent for the group amid a 9.7 percent increase in revenue.
The Stoxx Europe 600 erased its earlier advance to fall 0.4 percent, pulling back from the longest stretch of gains since July. European markets closed before the Fed announcement. Societe Generale SA, France’s second-biggest bank, rallied 1.9 percent as earnings more than doubled. Statoil ASA fell 5.4 percent after cutting its output target. Anheuser-Busch InBev NV lost 3.2 percent as profit missed estimates.
Irish Bonds
Irish 10-year bonds dropped for the seventh straight day, sending the yield up 15 basis points, or 0.15 percentage point, to 7.44 percent on concern that the government will have to pump more money into Allied Irish Banks Plc, whose subordinated-debt swaps signal a 63 percent probability of default within the next five years. The cost of insuring Irish sovereign debt against default surged to a record, with credit-default swaps rising 36.5 basis points to 554.5, according to CMA, a data provider.
The difference in yield, or spread, between Portuguese 10- year notes and German bunds, Europe’s benchmark government debt securities, widened 11 basis points to 388 basis points. The Greek-German spread increased seven basis points to 840 basis points.
German Finance Minister Wolfgang Schaeuble said the euro’s stability depends on making investors pay for future debt crises, brushing aside warnings that Germany’s demands are hurting Europe’s most-indebted countries.
The Hang Seng China Enterprises Index of Hong Kong-traded shares advanced the most among equity indexes worldwide after Goldman Sachs Group Inc. said the city’s shares have the most to gain from extra liquidity released by stimulus measures and China’s economic growth. South Korea’s Kospi Index rose 0.9 percent to the highest level since December 2007 as Deutsche Bank increased its outlook for the nation’s shares.
To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
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