Stocks in U.S. Rebound, Treasuries Retreat as Silver, Gold Prices Plunge

U.S. stocks rose, trimming the Dow Jones Industrial Average’s worst weekly loss since 2008, European equities rebounded and Treasuries fell amid signs policy makers will act to prevent the debt crisis from worsening. Silver plunged the most since at least 1979.

The Dow added 0.4 percent to 10,771.48 at 4 p.m. New York time, paring this week’s loss to 6.4 percent. The Standard & Poor’s 500 Index climbed 0.6 percent to 1,136.43 after losing 7.1 percent in the first four days of the week. The Stoxx Europe 600 Index rose 0.6 percent. Ten-year Treasury yields surged 11 basis points to 1.82 percent after touching a record low 1.67 percent. Silver sank 18 percent and gold slid 5.9 percent, giving futures the biggest two-day loss since 1983.

Europe’s governments are speeding the setup of a permanent rescue fund, an internal working paper shows. The European Central Bank may step up efforts to ease financial-market tensions, including offering banks 12-month loans, Governing Council members said. About $3.5 trillion had been erased from global equity values this week before today, driving the MSCI All-Country World Index into a bear market and price-earnings ratios down to the lowest levels since March 2009.

“If the ECB can come up with a more credible plan that suggests that they are being aggressive in dealing with a deteriorating financial system, this market is going to respond very positively,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $48 billion, said in a telephone interview.

Stability Mechanism

Stocks drifted between gains and losses for most of the day before heading higher after a staff paper obtained by Bloomberg News showed that senior European finance officials next week will examine the cost advantages of creating the rescue fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule. The fund will have 500 billion-euros ($677 billion) that could help shield countries like Italy and includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.

Group of 20 officials said after talks in Washington that they were “committed to a strong and coordinated international response to address the renewed challenges facing the global economy.” U.S. stocks tumbled this week after the Federal Reserve said there were “significant downside risks” to gross domestic product and the central bank will replace shorter-term Treasuries in its portfolio with longer-term debt in an effort to suppress interest rates and bolster growth.

Bear Markets

Benchmark measures for 32 out of the 45 nations in the MSCI All-Country World Index have posted 20 percent declines from their respective peaks, meeting the common definition of a bear market, according to data compiled by Bloomberg. The MSCI gauge passed that threshold yesterday, extending its slump since May 2 to 22 percent. Among the countries with the 20 biggest losses from their highs, 18 are located in Europe. The exceptions are Hong Kong and Brazil. The S&P 500 has fallen about 17 percent since reaching a three-year high on April 29.

The S&P 500 started the session trading for 12.4 times earnings in the last 12 months, within 2 percent of a low of 12.2 reached Aug. 8, data compiled by Bloomberg show. The ratio would have to narrow another 18 percent to match its level on March 9, 2009, the start of the bull market in which the gauge rose as much as 102 percent, the data show.

The price-earnings ratio as of yesterday was 5.1 percent below the S&P 500’s average valuation of 13 at its lowest point in the last nine bear markets, data compiled by Bloomberg show. To reach the lowest of those, 7 on June 21, 1982, the index would have to fall 43 percent to about 640, based on profit in the last 12 months of $91.41 a share.

BofA, Intel

Bank of America Corp. (BAC) rallied 4.1 percent, rebounding from a two-year low, for the top gain in the Dow. Intel Corp. and Home Depot Inc. also climbed more than 2 percent to lead the benchmark average higher.

Seven of the 10 main industry groups in the S&P 500 rose, with companies that rely on discretionary consumer spending and financial stocks leading gains. Ford Motor Co. rallied 2.5 percent after saying U.S. sales of pickup trucks are at their highest pace since December. The S&P 500 Financials Index rebounded from its lowest level since July 2009, with Citigroup Inc. gaining 4.3 percent, JPMorgan Chase & Co. up 1.1 percent and Wells Fargo & Co. climbing 2.2 percent.

Gold futures fell as much as $110 to $1,631.70 an ounce as some investors sold the metal to cover losses in other assets. Silver futures for December delivery tumbled 18 percent to $30.101 an ounce, the most since October 1979. Copper lost 6 percent to $3.28 a pound and touched $3.215, the lowest for a most-active contract in more than a year.

Commodities Index

The S&P GSCI Index of commodities slumped 1.4 percent to the lowest level on a closing basis in almost 10 months.

European stocks erased a drop of as much as 2.6 percent in the Stoxx 600 as Societe Generale SA and BNP Paribas SA, France’s biggest banks, climbed more than 8.7 percent to lead a rally in financial shares. The Stoxx 600 declined to the lowest level since July 2009 yesterday, extending the loss from this year’s high on Feb. 17 to 26 percent. The index lost 6.1 percent this week, the most since Aug. 5.

A measure of banks’ reluctance to lend to one another in Europe rose for a third day to the highest since March 2009. The Euribor-OIS spread, the difference between the three-month euro interbank offered rate and overnight index swaps, climbed to 89 basis points as of 5:10 p.m. in London, from 85 yesterday, Bloomberg data show.

Less Lending

Money-market mutual funds reduced lending to European banks further last month, with the biggest U.S. funds cutting their holdings to the lowest in at least five years, as the region’s sovereign debt crisis worsened. The 10 biggest U.S. funds eligible to purchase corporate debt, with a combined $676 billion, reduced European bank assets to 42 percent of holdings, the lowest level since at least 2006, Fitch Ratings said today in a report.

Among European bond markets, yields on Italian and Spanish 10-year debt fell, while rates on U.K., French and German debt increased. Greece’s two-year yield surged 317 basis points, or 3.17 percentage points, to 69.69 percent.

The MSCI Emerging Markets Index slumped 1.6 percent, extending its weekly loss to 11 percent, the most since November 2008. South Korea’s Kospi Index tumbled 5.7 percent for the biggest drop among global equity gauges, while Russia’s Micex Index fell 4.5 percent.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; 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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