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Stocks, Treasuries Fall on Fed Speculation Amid Earnings

Photographer: Ralph Orlowski/Bloomberg

A trader monitors financial data on his computer screens as he works inside the Frankfurt Stock Exchange in Frankfurt. Close

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Photographer: Ralph Orlowski/Bloomberg

A trader monitors financial data on his computer screens as he works inside the Frankfurt Stock Exchange in Frankfurt.

U.S. stocks and Treasuries fell as housing and manufacturing data fueled speculation the Federal Reserve may reduce its asset-buying this year as investors weighed earnings reports from Apple (AAPL) Inc. to Caterpillar Inc.

The Standard & Poor’s 500 Index fell 0.4 percent to 1,685.94 at 4 p.m. in New York, after climbing to within 3 points of 1,700 for a third straight day. The yield on 10-year Treasuries jumped eight basis points to 2.59 percent. The Stoxx Europe 600 Index rallied 0.6 percent to an almost eight-week high. The Bloomberg Dollar Index climbed 0.5 percent for its first advance in four days, and the euro gained against most of its 16 major peers. Oil tumbled 1.7 percent and gold lost 1.1 percent.

New U.S. home sales rose more than forecast in June to the highest level in five years. Manufacturing indexes based on surveys of purchasing managers rose in the U.S. and Germany this month, London-based Markit Economics said today, while preliminary data showed China’s manufacturing contracted more than economists estimated.

“What I am looking at is an extended market that has basically gone parabolic straight up,” Tim Hartzell, founder and chief investment officer of Sequent Asset Management who helps oversee $425 million in Houston, said in a telephone interview. “It is all predicated on the Fed continuing to pump money into the system. When the punchbowl gets taken away, there’s the old cliché that the party will be over. With the market at the highs, it is probably pretty easy to trim things here and take profits.”

Equities and bonds retreated amid speculation the Fed may reduce its purchases of government securities this year, and extended declines after a notes auction. The central bank will start trimming its $85 billion in monthly bond purchases in September, according to a survey of economists by Bloomberg News. The Fed has said economic data will determine the timing and pace of any reduction in monthly asset purchases.

Home Sales

U.S. new-home sales climbed 8.3 percent to an annualized pace of 497,000 homes, the highest level since May 2008, the Commerce Department said in Washington today. The median estimate of 77 economists surveyed by Bloomberg called for a gain to 484,000.

The Markit Economics preliminary index of U.S. manufacturing increased to 53.2 in July from a final reading of 51.9 a month earlier, the London-based group said today. The median forecast in a Bloomberg survey of 16 economists called for a gain to 52.6. A reading greater than 50 indicates expansion.

Bull Market

Support from central banks and better-than-estimated corporate earnings have driven the S&P 500 (SPX) up as much as 151 percent from its March 2009 low. The rally has pushed valuations close to the highest level since May 2010, with the S&P 500 trading at 16.3 times reported earnings, data compiled by Bloomberg show.

When the S&P 500 rose to a record close on July 22, the gauge had gained for 12 of the previous 13 trading days, a stretch that hasn’t happened since September 1995, data compiled by Bloomberg show. The 14-day relative-strength index for 83 S&P 500 stocks exceeded 70 that day, the most since May 21, Bloomberg data show. RSI measures the degree to which gains and losses outpace each other, and some analysts who watch charts to predict market moves consider a reading over 70 as an indication the stock has risen too far, too fast.

‘Big Run’

“The market has had a big run and we are a bit overbought here,” Bruce Bittles, chief investment strategist at RW Baird & Co., said in a telephone interview from Sarasota, Florida. His firm oversees $100 billion. “There is a lot of optimism coming into the market short term, so I wouldn’t be surprised if we rested in here for a while.”

Of the 178 companies in the benchmark gauge that have posted quarterly results so far, 71 percent have exceeded analysts’ profit estimates and 57 percent have topped sales projections, data compiled by Bloomberg show.

Caterpillar slipped 2.4 percent, the most in the Dow Jones Industrial Average (INDU), after cutting its earnings forecast. Broadcom Corp. sank 15 percent, for the biggest decline in the S&P 500, after predicting revenue that trailed estimates. Apple advanced 5.1 percent, it’s largest rally since November, after revenue and sales topped forecasts. Ford Motor Co. added 2.5 percent after raising its full-year profit target.

All 10 main industries in the S&P 500 fell except for technology companies, which added 0.9 percent. Utility and commodity shares lost the most, retreating at least 0.9 percent.

Facebook Inc. surged 20 percent after the markets closed as the company reported earnings that beat estimates. Baidu Inc., the owner of China’s largest Internet search engine, jumped 12 percent in late trading after profit topped forecasts as increasing use of smartphones attracted advertisers.

Notes Auction

The Chicago Board Options Exchange Volatility Index, or VIX, jumped 4.1 percent today to 13.18. The equity volatility gauge, which moves in the opposite direction as the S&P 500 about 80 percent of the time, reached a six-month high in June and has since fallen 36 percent.

Treasuries extended their drop after the U.S. sale of $35 billion in five-year notes was met with weaker-than-average demand. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.46, compared with 2.45 at the June sale, the least since September 2009, and an average of 2.8 for the past 10 sales.

The yield on the current five-year note rose seven basis points to 1.38 percent.

European stocks rose to the highest level since May 30 as a report signaled Germany is leading a revival in euro-area manufacturing. Preliminary data showed euro-area manufacturing expanded this month for the first time since July 2011, with a purchasing managers’ gauge increasing to 50.1 from 48.8 in June, Markit Economics said. Economists in a Bloomberg survey had predicted 49.1.

Volvo Rises

Volvo AB (VOLVB) gained 5 percent as the world’s second-largest truckmaker reported earnings that beat estimates. EasyJet Plc jumped 3.7 percent after the budget airline’s quarterly sales rose 11 percent. The volume of shares changing hands in Stoxx 600 companies was 14 percent less than the 30-day average, according to data compiled by Bloomberg.

Stocks fell for the first time in three days in Shanghai. China’s manufacturing weakened by more than estimated in July, according to a preliminary survey. The reading of 47.7 for the Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics compares with the 48.2 median estimate in a Bloomberg News survey of 19 economists.

“The bad PMI data is proving that the economy is declining further and there are worries that company profits may retreat too,” said Zhang Haidong, an analyst at Tebon Securities Co. in Shanghai. “It seems the government is persistent in not changing its monetary policy and this will drag the market lower.”

Dollar, Euro

The euro gained 0.7 percent versus the yen and slipped 0.2 percent to $1.3202. The dollar rose 0.9 percent to 100.30 yen and Australia’s currency slid 1.4 percent to 91.67 U.S. cents. The yen weakened against 10 of its 16 major peers.

Germany’s 10-year bunds declined, pushing the yield 10 basis points higher to 1.65 percent. The yield on Italian 10-year bonds was little changed at 4.37 percent and the rate on similar-maturity Spanish debt fell one basis point to 4.68 percent.

Oil tumbled 1.7 percent, the most in more than a month, to $105.39 a barrel amid the China manufacturing data and a report showing U.S. output surged to a 22-year high last week. The Energy Information Administration said crude production rose 0.9 percent to 7.56 million barrels a day, the most since December 1990. Crude and fuel supplies declined, the report showed.

Gold declined the most in two weeks as home sales added to signs the Fed may scale back financial stimulus measures. Futures for December delivery dropped 1.1 percent to $1,320.30 an ounce on the Comex in New York. Gold has slumped 21 percent this year.

Copper slipped 0.6 percent in New York, snapping the longest rally in nine months.

To contact the reporters on this story: Alex Barinka in New York at abarinka2@bloomberg.net; Jeff Sutherland in New York at jsutherlan13@bloomberg.net

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

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