Dollar Rises, Treasuries Fall as Stocks Erase Gain on Fed

The dollar rose, U.S. stocks erased gains and Treasuries slid as the Federal Reserve refrained from announcing new efforts to stimulate the economy and investors shifted focus to tomorrow’s meeting of European policy makers.

The Dollar Index, a gauge of the currency against six major peers, climbed 0.6 percent to 83.13 as the euro slid 0.6 percent to $1.2225 at 4 p.m. New York time. The Standard & Poor’s 500 Index slipped 0.3 percent to 1,375.32 after gaining 0.4 percent earlier. Ten-year Treasury yields increased five basis points to 1.52 percent. The S&P GSCI Index rose 0.3 percent as gasoline and oil rallied, while silver and nickel led declines.

The central bank said economic growth had decelerated “somewhat” over the first half of the year. The Federal Open Market Committee said it will monitor conditions and provide more monetary accommodation if needed to bolster the economy, disappointing investors anticipating a definitive sign of imminent monetary easing. Before the Fed’s announcement today, economists surveyed by Bloomberg predicted Chairman Ben S. Bernanke was likely to wait until September to announce a third round of large-scale asset purchases.

“The Fed is in a tough place,” said David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc. His firm oversees about $650 billion. He spoke in a phone interview. “The economic data is ambiguous enough to justify doing something or doing nothing. They chose to wait and see. That comes as a disappointment to some people.”

Dollar Rises

The U.S. dollar strengthened against 12 of 16 major peers, rising the most against the South African rand and British pound. The euro weakened against 12 of 16 counterparts tracked by Bloomberg. U.S. 30-year bonds tumbled, sending yields up four basis points to 2.59 percent.

ECB Chairman Mario Draghi is trying to win consensus across governments and central banks for a plan to shore up the region’s bond market that could be announced as soon as tomorrow after he chairs the ECB’s Governing Council meeting. Last week, Draghi signaled he is willing to take the ECB further than his predecessor, Jean-Claude Trichet, in building a firewall around Spain and Italy. Earlier last month, he jettisoned Trichet’s mantra that senior bondholders at crippled banks shouldn’t suffer losses.

For the first time in more than two years, commodities, equities, bonds and the dollar posted monthly gains, as the U.S. drought sent corn prices to a record and Draghi’s pledge to protect the euro buoyed stocks.

July’s Tally

Raw materials led the increase as the S&P GSCI Total Return Index of 24 raw materials rose 6.4 percent in July, the most since October. The MSCI All-Country World Index of equities rallied at the end of the month for a 1.4 percent gain. The U.S. Dollar Index (DXY), a measure against six currencies, added 1.3 percent. Bonds of all types returned 1.4 percent on average, the most since December, Bank of America Merrill Lynch’s Global Broad Market Index shows.

The S&P 500 (SPX) rallied almost 10 percent in the first seven months of the year amid speculation that weakening economic data will cause policy makers in the U.S. and around the world to take steps to safeguard the global economic recovery.

Manufacturing in the U.S. unexpectedly contracted for a second month in July, according to a report today, showing a mainstay of the economy was struggling to improve as global economies weakened. The Institute for Supply Management’s factory index was at 49.8 last month, close to the three-year low of 49.7 reached in June. A reading of fifty marks the dividing line between expansion and contraction. Another report showed construction spending in the U.S. increased in June to the highest level in almost three years as the housing market continued to stabilize.

Jobs Report

U.S. companies added 163,000 workers in July, according to figures from Roseland, New Jersey-based ADP Employer Services. That’s more than the 120,000 median of 38 estimates in a Bloomberg survey. Government data on Aug. 3 is forecast to show the nation added 100,000 jobs last month and the unemployment rate lingered at 8.2 percent.

“I wasn’t expecting anything new from the Fed,” John Carey, who helps oversee about $220 billion at Pioneer Investments in Boston, said in a telephone interview. “It would be premature to do something ahead of any European action and the jobs report. They are watching closely, at some point they may step in, but they need more information. We’ll wait for the next chapter I guess.”

Dozens of U.S. stocks swung 10 percent or more without accompanying news in the first minutes of trading, whipsawing investors and spurring speculation that computers distorted prices for the second time in two weeks.

Knight Issues

Knight Capital Group Inc. (KCG) told some clients of its market- making unit that a “technical issue” was affecting its systems and advised them to route orders elsewhere until further notice. Knight, which helps execute billions of dollars in equity transactions every day, said the issue was confined to market making and other operations were unaffected. Its stock plunged 33 percent, the most since 1998.

Goodyear Tire & Rubber Co. (GT) rose more than 10 percent in the minutes after the 9:30 a.m. open in New York. Manitowoc Co. gained 14 percent, Pandora Media Inc. (P) climbed almost 11 percent and Level 3 Communications Inc. plunged 15 percent before the swings narrowed minutes later, according to data compiled by Bloomberg.

NYSE Reviews

The NYSE said it was reviewing trades in 140 securities between 9:30 a.m. and 10:15 a.m. New York time, according to a statement on its website. Trades executed 30 percent or more above their opening price will be broken, the exchange said.

Investors also watched corporate results. MasterCard Inc. (MA), the world’s second-biggest payments network, lost 2.2 percent amid disappointing sales. Avon Products Inc. (AVP) slumped 1.2 percent as the door-to-door cosmetics seller reported a 70 percent decline in earnings. Comcast Corp. (CMCSA), the largest U.S. cable company, and Allstate Corp. (ALL), the biggest publicly traded U.S. home and auto insurer, advanced more than 3.1 percent after quarterly earnings beat projections.

About 72 percent of the S&P 500 companies which reported second-quarter earnings beat estimates, data compiled by Bloomberg showed, even as 60 percent missed analysts’ sales forecasts.

The Stoxx Europe 600 Index (SXXP) added 0.5 percent. Trading of companies in the gauge was 26 percent lower than the 30-day average, according to data compiled by Bloomberg.

Next Plc (NXT) jumped 6.5 percent as the U.K. retailer increased its annual profit forecast after reporting first-half sales that rose more than analysts estimated. Arkema SA climbed 5.7 percent as second-quarter earnings beat estimates. Mediaset SpA (MS), the broadcaster controlled by former Italian Prime Minister Silvio Berlusconi, dropped 11 percent after profit declined 65 percent amid lower advertising sales.

Bearish Options

Bearish options on European stocks have fallen to the cheapest levels compared with bullish ones in 19 months as traders bet that Draghi will deliver on his promise to save the euro. The ECB will hold its next policy meeting tomorrow.

The yield on the German 10-year bund increased eight basis points to 1.37 percent as the government sold 3.35 billion euros ($4.1 billion) of five-year notes at a yield of 0.31 percent. The Spanish 10-year bond yield fell two basis points to 6.73 percent. Italy’s 10-year rate dropped 15 basis points.

The MSCI Emerging Markets Index (MXEF) was little changed. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong advanced for a fourth day, adding 0.9 percent, in its longest winning streak in six months. The FTSE/JSE Africa All Share Index jumped 1.4 percent in Johannesburg.

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: Lynn Thomasson at lthomasson@bloomberg.net

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