U.S., European Stocks Rally as Treasuries, Dollar Erase Gains

U.S. Stocks Halt Global Slump
A trader works on the floor of the New York Stock Exchange in New York. Photographer: Jin Lee/Bloomberg

Stocks surged, sending U.S. benchmark indexes up the most since May, while the dollar and Treasuries slid as growth in American retail sales bolstered optimism in the earnings season and investors speculated European banks will pass stress tests.

The Standard & Poor’s 500 Index extended a two-day rebound from a 10-month low, rallying 3.1 percent to 1,060.27 at 4 p.m. in New York for its best gain since May 27. The Stoxx Europe 600 Index climbed 1.4 percent as Spanish and Italian lenders surged. The Dollar Index lost 0.2 percent to a two-month low of 83.888 and 10-year Treasury yields rose six basis points to 2.99 percent. Oil climbed from a four-week low and copper jumped.

Retailers advanced as the International Council of Shopping Centers said sales were growing at the fastest pace since 2006, easing concern that a slump in consumer confidence will undermine the economic recovery. Banks led the rally as State Street Corp. reported a profit and people with knowledge of the talks said European stress tests may assume a 17 percent loss on Greek bonds, half of the worst-case scenario estimated by JPMorgan Chase & Co.

“The market is very oversold,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. “The improvement in retail sales numbers was enough to get some people back in. Over the next few weeks, we’ll probably get both economic and earnings data that will show that we’re not going to go back into recession.”

Rebound After Slump

The S&P 500 has tumbled 13 percent from its 2010 high in April amid a deceleration in the manufacturing and service industry expansion, a slow-to-recover job market and concern over Europe’s debt crisis and China’s steps to cool its economy. The gauge’s 14-day relative strength index, a measure of market momentum, fell to 30 on July 2, the day the S&P 500 closed at its lowest since September. An RSI of 30 often signals that stocks fell too far, too fast to analysts who study charts.

The Dow Jones Industrial Average rose yesterday for the first time in eight days, snapping its longest losing streak since the financial crisis of 2008. Cisco Systems Inc., JPMorgan, American Express Co. and General Electric Co. surged more than 4.6 percent today to lead the 30-stock gauge to its first back-to-back advance in almost three weeks. The Dow surged 274.66 points, or 2.8 percent, to 10,018.28 for its first close above 10,000 this month.

Profit for S&P 500 companies is projected to increase 34 percent in 2010, compared with the 27 percent estimated on March 29, according to more than 8,000 estimates compiled by Bloomberg. The Dow’s second-quarter earnings season starts next week when Alcoa Inc. reports on July 12.

‘Salivating a Bit’

A 5 percent slide last week pushed the S&P 500 to 12.5 times estimated earnings, the cheapest since March 2009 when the measure began an 80 percent rally.

“Folks are perhaps salivating a bit about some of the prospects of earnings,” said Barry James, who manages $2 billion as chief executive officer at James Investment Research Inc. in Xenia, Ohio. “That combined with the fact that the market was down so much last week is offering an opportunity for the market to rebound this week.”

All but one of 31 stock in an S&P 500 gauge of retailers advanced. Sales probably expanded at an average monthly rate of 4 percent in the first five months of the fiscal year that began Jan. 31, the biggest gain since 2006, the International Council of Shopping Centers trade group said before its June report tomorrow. Nordstrom Inc. and Kohl’s Corp. are among chains that will report June sales increases at stores open at least a year, according to analysts’ estimates.

Two-Day Advance

The MSCI World Index of 24 developed nations rallied 3.7 percent over the past two days, the most since May.

Longer-term Treasuries fell as investors sold government securities before the U.S. announces the size of its note and bond sales scheduled for next week. Thirty-year bond yields rose eight basis points to 3.97 percent. Two-year yields were little changed near 0.63 percent after touching a record low of 0.5856 percent on June 30.

Treasury Secretary Timothy F. Geithner said the U.S. economy is growing and healing from the damage caused by the 2008 financial crisis.

“We still have a long way to go,” Geithner told Treasury Department employees at an appearance today in Washington with first lady Michelle Obama. “We still have a lot of challenges to meet. But we are coming back. We are healing the damage caused by the crisis. We are growing again.”

Stress Tests

The Stoxx 600 extended its two-day gain to 4 percent, its biggest since the end of May, as Spain’s Banco Santander SA, France’s BNP Paribas and London-based Barclays Plc led a 3.9 percent rally in the index’s bank shares. Benchmark indexes for Spain and Italy jumped more than 3.3 percent.

The two people briefed on the European stress-test talks also said banks may assume a loss of 3 percent on Spanish bonds. There are unlikely to be so-called haircuts on German government securities under the evaluations being overseen by the Committee of European Banking Supervisors, said the people, who declined to be identified because the talks are private.

JPMorgan had estimated losses of 10 percent to 20 percent on Spanish bonds, and haircuts of 0 percent to 10 percent on German bunds, according to a note to clients today.

“The markets were ready for a rebound, all they needed was a trigger,” said London-based Mike Lenhoff, chief strategist at Brewin Dolphin Securities Ltd., whose parent company oversees $33 billion. “In this case, they are getting a trigger from the bank stress tests,” he said. “It may not be as strict but the fact of the matter is that it is being applied. It could help the inter-lending market and therefore the equity market too if it has any credibility attached to it.”

Recovery Swaps

Credit markets are pricing in losses of about 60 percent on Greek bonds should the government default. Derivatives known as recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or debt restructuring.

The stress tests will be conducted on 91 companies that account for 65 percent of the region’s banking industry. They’ll examine whether the lenders can withstand a shrinking economy over two years and a drop in government bond values. Results of the tests will be disclosed July 23.

Earlier declines in global stocks came after a report showed German factory orders unexpectedly fell in May, the first time in five months, as demand for goods from Europe’s largest economy waned across the 16-nation euro region.

The MSCI Asia Pacific Index retreated 0.5 percent, its first drop in three days, after yesterday’s Institute for Supply Management report showed slower-than-estimated growth in U.S. service industries.

Dollar, Euro

The U.S. dollar weakened against 12 of 16 major counterparts, led by declines of at least 0.8 percent against the Brazilian real, Australian dollar and New Zealand dollar. The euro increased 0.2 percent $1.2650, near the highest level since May reached yesterday.

Crude oil for August delivery gained for the first time in seven days, rising 2.9 percent to $74.07 a barrel in New York. Copper jumped 1.5 percent to $3.015 a pound in New York, extending its three-day gain to more than 5 percent.

Wheat rose to the highest price since January after analysts lowered production estimates for Russia and France because of hot, dry weather. Wheat futures for September delivery rose 4.5 percent to $5.305 a bushel on the Chicago Board of Trade. Corn and soybeans rallied on speculation heavy rain will reduce yields in the U.S., the biggest exporter of both crops.

A benchmark indicator of corporate credit risk in the U.S. fell for the fourth time in five business days, indicating improving investor confidence. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, dropped 2.9 basis points to a mid-price of 118.8 basis points as of 1:54 p.m. in New York, the lowest since June 28, according to Markit Group Ltd.

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