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Stocks Gain on Earnings Optimism; Gold Rises, Pound Falls

Photographer: Ralph Orlowski/Bloomberg

Traders work on the floor of the Frankfurt Stock Exchange in Frankfurt. Close

Traders work on the floor of the Frankfurt Stock Exchange in Frankfurt.

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Photographer: Ralph Orlowski/Bloomberg

Traders work on the floor of the Frankfurt Stock Exchange in Frankfurt.

U.S. stocks rose for a fourth day amid optimism companies will report better-than-forecast earnings for the second quarter. Gold advanced and the yen weakened, while the British pound touched a three-year low.

The MSCI All-Country World Index climbed 0.8 percent at 4 p.m. in New York and the Standard & Poor’s 500 Index rose 0.7 percent, erasing its loss since the Federal Reserve’s June meeting. The pound slid after U.K. manufacturing unexpectedly shrank in May. Treasury three-year yields were little changed after the U.S. sold $32 billion of the notes today at the highest yields since June 2011. Gold rallied 0.9 percent, while corn and wheat jumped more than 2 percent as dry, warm U.S. weather increased the risk of crop damage.

Earnings reports have helped fuel stock gains in the four-year-old bull market. The S&P 500 rallied an average of 1.6 percent in the two weeks after Alcoa Inc. (AA) marked the start of the reporting season, according to data compiled by Bloomberg. Stocks were up two weeks later in 13 of the 17 reporting seasons since the bull market began in 2009. Analysts have lowered forecasts for last quarter and currently predict profit growth of 1.8 percent for S&P 500 companies, compared with a projection for an 8.3 percent increase at the beginning of the year.

“The economic data is suggesting that we’re not going to see earnings roll over,” Brian Jacobsen, who helps oversee $221.2 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said by telephone. “Expectations for second-quarter earnings had fallen quite a bit and we’re beginning to see that the downgrades were by too much. We could see some pleasant surprises in the earnings season.”

IMF Forecasts

Global stocks remained higher even after the International Monetary Fund said worldwide economic growth will struggle to accelerate this year. Global growth will be 3.1 percent this year, unchanged from the 2012 rate, and less than the 3.3 percent forecast in April, the IMF said. The IMF reduced its 2013 projection for the U.S. to 1.7 percent growth from 1.9 percent in April, while next year’s outlook was trimmed to 2.7 percent from 3 percent.

The IMF urged central banks in wealthy nations facing low inflation and economic slack to keep injecting stimulus until recovery is entrenched, saying rising longer-term interest rates have hurt emerging markets the most. The developing economies need to be alert for financial risks if the “anticipated unwinding” of the U.S. Federal Reserve’s bond-buying program reverses capital flows, the IMF said.

Fed Watch

The S&P 500 has recovered all its losses following a 4.8 percent drop between June 19 and 24, triggered when Chairman Ben S. Bernanke said the central bank may reduce the pace of bond purchases later this year as economic risks subside. Minutes from the Fed’s June meeting will be released tomorrow at 2 p.m. New York time. The S&P 500 is still down 1 percent from its last record on May 21, the day before Bernanke told Congress the Fed could taper purchases.

Financial shares recovered after briefly erasing early gains as regulators proposed capital standards at the biggest lenders should rise to 5 percent of assets for parent companies and 6 percent for their banking units. The Office of the Comptroller of the Currency proposed a leverage ratio that’s 2 percentage points more than the 3 percent international minimum for holding companies, the agency said in a statement.

The KBW Bank Index lost as much as 0.5 percent before recovering and rising 0.4 percent. Earnings at financials firms increased 17 percent in the second quarter, according to analysts’ estimates, to lead growth among the 10 main industries in the S&P 500. Excluding financials, S&P 500 profits fell 1 percent, according to data compiled by Bloomberg.

Market Leaders

Cisco Systems Inc. jumped 2.2 percent, helping lead the Dow Jones Industrial Average higher, after announcing a deal with Microsoft Corp. on cloud computing infrastructure. Caterpillar Inc., Chevron Corp., Bank of America Corp. and General Electric Co. rose at least 1.3 percent for the other top gains in the Dow. Homebuilders accounted for three of the four biggest advances in the S&P 500, with D.R. Horton Inc., PulteGroup Inc. and Lennar Corp. jumping at least 5.5 percent.

FedEx Corp. rose 4.4 percent, the most in nine months, on speculation that it may be an investment target for William Ackman’s Pershing Square Capital Management LP, an Edward Jones analyst said.

Alcoa, America’s largest aluminum producer, lost 0.1 percent even after reporting earnings and sales that topped analysts’ estimates. Operating income at its engineered products business, which supplies components to aerospace and power companies, rose 12 percent from the first quarter. The company was the first member of the Dow to report results for the second quarter.

‘Obvious Picture’

“A positive earnings season would help in an environment where data may still not provide an obvious picture of the U.S. economy,” said Luca Paolini, who helps oversee about $66 billion in equities as chief strategist at Pictet Asset Management Ltd. in London. “The most critical issue we are looking at is company guidance for the next few quarters.”

The S&P 500 advanced for a fourth day, its longest rally in almost two months. The gauge has climbed 16 percent this year, compared with a 13 percent drop in the MSCI Emerging Markets Index and a 5.3 percent advance for the Stoxx Europe 600 Index.

European Movers

The Stoxx 600 rose 0.8 percent today, with trading 16 percent less than the 30-day average. Electricite de France SA surged 9.3 percent, its biggest rally in more than 4 1/2 years, after Le Parisien reported that the French government has authorized the country’s utilities to increase their prices by 5 percent from Aug. 1, 2014. Tariffs have climbed by 1.1 percent to 3 percent a year since 2006, according to the newspaper.

LVMH Moet Hennessy Louis Vuitton SA advanced 2.1 percent after agreeing to pay 2 billion euros ($2.6 billion) to buy 80 percent of Italian cashmere brand Loro Piana SpA.

U.K. stocks advanced, sending the FTSE 100 Index to a five-week high, as mining companies rallied. Alcoa maintained its forecast that global demand for aluminum will rise by 7 percent this year, led by 11 percent growth in China. BHP Billiton Ltd. and Anglo American Plc both climbed at least 2.4 percent.

The MSCI Emerging Markets Index gained for the first time in three days, advancing 0.8 percent. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong slipped 0.1 percent while the Shanghai Composite Index added 0.4 percent.

Egypt Rebounds

Egypt’s EGX 30 Index jumped 3.3 percent, rebounding from the biggest drop in almost a month, as the interim president set a timeline for new elections.

India’s Sensex rose 0.6 percent and the rupee gained 0.8 percent, rebounding from a record low, after regulators took steps to curb speculation in the derivatives market. Turkey’s benchmark index rose 0.4 percent after the biggest two-day selloff in two weeks.

Sterling retreated against 12 of its 16 major counterparts, slumping as much as 0.9 percent to $1.4814, the weakest since June 2010.

U.K. factory output fell 0.8 percent from April, when it declined 0.2 percent, the Office for National Statistics said in London. The median forecast of 25 economists in a Bloomberg News survey was a 0.4 percent increase.

Bank of England policy makers led by Governor Mark Carney signaled last week they will keep U.K. interest rates at a record low. U.K. government bonds advanced for a second day as investors sought safer assets. The Debt Management Office sold index-linked gilts maturing in 2029.

Treasury Auction

The three-year U.S. note yield was little changed at 0.68 percent today after climbing to 0.80 percent in June from May’s low of 0.29 percent. Treasuries were steady after the U.S. sold $32 billion of three-year notes at the highest yields since June 2011 amid speculation the Fed is preparing to reduce debt purchases.

The notes yielded 0.719 percent, compared with a forecast of 0.724 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.35, versus 2.95 at the previous auction and the highest since May. Treasuries rose yesterday amid speculation the yield surge had been too rapid.

‘Baked In’

U.S. bond yields suggest investors anticipate the Fed will announce a reduction in asset purchases at its September policy meeting, according to JPMorgan Chase & Co.’s Heather Loomis.

Tapering “does appear to be baked in,” with as much as 80 percent of the market expecting it, Loomis, director of fixed income in San Francisco for JPMorgan Private Bank, said during a Bloomberg Television interview with Sara Eisen and Erik Schatzker.

Greece’s 10-year yield increased six basis points to 10.99 percent and the rate on similar-maturity Portuguese debt fell 20 basis points to 6.73 percent. European governments said the nation would receive 2.5 billion euros this month and 500 million euros in October if it delivers on economic reforms and cuts to spending.

Spanish bonds fell, with the 10-year yield rising six basis points to 4.73 percent, as the government sells 15-year securities via banks.

The cost of insuring against losses on corporate bonds decreased, with the Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies dropping 5 basis points to 106.5, the lowest in a month.

Gold futures for August delivery added 0.9 percent to $1,245.90 an ounce as accelerating inflation in China boosted the appeal of the metal as a hedge, while demand increased for jewelry, coins and bars. Copper fell 1.1 percent in New York. West Texas Intermediate oil reached a 14-month high, gaining 0.4 percent to $103.53 a barrel.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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