Small-Cap Shares Rally as Treasuries Drop, Oil Gains

Photographer: Jerome Favre/Bloomberg

James Bullard, president of the St. Louis Federal Reserve Bank. Bullard speaks on the U.S. economic outlook in Tennessee today after U.S. nonfarm payrolls topped a pre-recession high in May. Close

James Bullard, president of the St. Louis Federal Reserve Bank. Bullard speaks on the... Read More

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Photographer: Jerome Favre/Bloomberg

James Bullard, president of the St. Louis Federal Reserve Bank. Bullard speaks on the U.S. economic outlook in Tennessee today after U.S. nonfarm payrolls topped a pre-recession high in May.

U.S. stocks extended all-time highs as smaller U.S. companies rallied amid merger activity. Treasuries fell as Morgan Stanley recommended going “maximum underweight” U.S. debt. Oil jumped and corn prices slumped.

The Russell 2000 Index (RTY), consisting of companies with an average market value of about $1.1 billion, added 0.9 percent as of 4 p.m. in New York. The Standard & Poor’s 500 Index rose 0.1 percent, after closing at an all-time high on June 6. The MSCI All-Country World Index added 0.1 percent to within a point of a record. Ten-year Treasury yields rose two basis points to 2.61 percent. A measure of 20 developing-nation currencies advanced a third day after China had the biggest trade surplus in five years. Oil increased 1.7 percent and corn futures tumbled 1.7 percent.

Family Dollar Stores Inc. and Analog Devices Inc. rallied amid deals activity. The extra yield that 10-year Treasuries offer over their G-7 counterparts reached 72 basis points, the most since April 2010. Chinese exports topped estimated in May, helping to cushion an economic slowdown as an unexpected slump in imports highlights the risks to growth.

“There’s a fair amount of skepticism over if we are at peak valuations,” Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ U.S. Intermediary Business, said by phone. State Street Corp. oversees $2.4 trillion in assets. “My view is the Goldilocks economy is back -- not too cold, not too hot, but just right. What we’re starting to see is companies starting to do capital expenditures and M&A to invest in their businesses.”

The S&P 500 advanced 1.3 percent to a record 1,949.44 last week as the ECB lowered interest rates and a report showed that the U.S. economy created more jobs than expected. The index has continued to climb to records even as the U.S. economy contracted for the first time in three years during the first quarter. The Russell 2000 has advanced 4.4 percent in the past four sessions to the highest since April.

Central Banks

Federal Reserve officials are watching the labor market as they move to complete their bond-purchase program late this year and start considering the timing of the first interest-rate increase since 2006. The ECB’s stimulus sent European bond yields to all-time lows and helped boost the region’s equities to the highest in six years.

Calm is pervading the U.S. stock market like no time in seven years. The Chicago Board Options Exchange Volatility Index fell 5.9 percent last week to 10.73, the lowest level since February 2007. The gauge, known as the VIX, was within two points of an all-time low. It climbed 5 percent today to 11.27.

Market Risk

A risk measure that uses options to forecast fluctuations in equities, currencies, commodities and bonds fell to its lowest level ever. Bank of America Corp.’s Market Risk Index dropped to minus 1.27 on June 6. Levels less than zero indicate less stress than is normal.

Treasuries fell a second day before data this week that economists said will show improvement in the U.S. labor market and consumer confidence.

Investors should sell Treasuries on the relative U.S. economic strength, Matthew Hornbach, the global head of interest-rate strategy at primary dealer Morgan Stanley, wrote today in a note to clients.

“ECB policy should no longer place downward pressure on U.S. yields,” Hornbach wrote. “Stronger growth and inflation will lead the Federal Reserve to begin hiking rates aggressively in early 2015.”

Hillshire Brands Co. gained 5.4 percent today after Tyson Foods Inc. said it made a binding offer. Family Dollar jumped 13 percent as a filing showed Carl Icahn has amassed a 9.4 percent stake. Analog Devices jumped 5 percent after agreeing to buy a chipmaker for about $2 billion. Idenix Pharmaceuticals Inc. more than tripled after Merck & Co. agreed to buy the drugmaker.

Apple Split

Apple Inc. traded at $93.70, rallying 1.6 percent after adjusting for a seven-for-one stock split. The shares closed Friday at $645.57. Apple said on April 23 it was doing the stock split so shares would be available to a wider pool of investors. With the split, each investor on June 2 received six additional shares.

The Stoxx Europe 600 Index climbed 0.4 percent to the highest level since 2008 as all but two of 19 industry groups advanced.

Spanish and Italian lenders gained after JPMorgan Chase & Co. recommended buying shares in Banco Popular Espanol SA (POP), saying lenders in euro area’s most-indebted countries would benefit from the ECB’s measures to combat inflation, which include a package of cheap loans for banks. Popular climbed 4.6 percent and Spain’s Banco Sabadell SA gained 2 percent.

Emerging Markets

Spain’s bonds rose, sending the 10-year yield below that on Treasuries for the first time in four years.

Markets in Austria, Switzerland, Denmark, Norway and Greece were closed today for a public holiday.

The MSCI Emerging Markets Index increased 0.4 percent. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong rose 0.6 percent to the highest since April 10. India’s S&P BSE Sensex Index jumped 0.7 percent to a record.

China’s trade surplus swelled to $35.92 billion. Overseas shipments gained 7 percent from a year earlier, the Beijing-based customs administration said. That topped the median estimate of 6.7 percent in a Bloomberg News survey of analysts. Imports fell 1.6 percent, a drop that wasn’t forecast by any of the 42 economists in a Bloomberg survey that had a median projection for a 6 percent gain.

The People’s Bank of China raised its daily yuan fixing by the most since October 2012, boosting the daily reference rate by 0.22 percent, limiting the scope for the currency to depreciate.

Ukraine Crisis

Russia’s ruble strengthened 0.2 percent and the Micex index was little changed.

Peace talks between Russia and Ukraine are being held in Kiev, with the former Soviet republic’s new president, Petro Poroshenko, saying in a statement on his website that the violence in Ukraine must end this week. Talks yesterday included Ukrainian ambassador to Germany Pavlo Klimkin, Russia’s envoy to Ukraine Mikhail Zurabov and Heidi Tagliavini, a special representative for the Organization for Security and Cooperation in Europe.

Dubai Retreat

Dubai’s benchmark gauge declined 4.1 percent. The gauge’s two-day, 6.5 percent slide trimmed this year’s gain to 42 percent, still the best performance in dollar terms among 93 indexes tracked by Bloomberg worldwide.

West Texas Intermediate oil increased 1.7 percent to $104.41 a barrel. China and the U.S. are the biggest energy consumers. Copper dropped 0.2 percent to $3.0435 a pound in New York, the fifth consecutive drop and longest streak since March 3.

Corn fell 1.7 percent to $4.51 a bushel in Chicago trading. China’s quarantine agency suspended issuing permits to import a U.S.-produced animal-feed ingredient made from corn, said three trading executives whose applications were denied.

The euro slipped 0.4 percent to $1.3590, after dropping to $1.3503 on June 5, the lowest since Feb. 6. The shared currency weakened 0.3 percent to 139.34 yen. Japan’s currency dropped 0.1 percent to 102.53 per dollar.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Oliver Renick in New York at orenick2@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeff Sutherland, Michael P. Regan

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