Stocks, Treasuries Rise, Dollar Weakens Before Fed’s Decision

Ben S. Bernanke, chairman of the U.S. Federal Reserve
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

U.S. stocks rallied, sending benchmark indexes to six-month highs, as investors awaited the Federal Reserve’s plans to boost the economy and election results that may divide Congress. The dollar weakened and Treasuries rose.

The Standard & Poor’s 500 Index climbed 0.8 percent to 1,193.57 at 4 p.m. in New York and the Stoxx Europe 600 Index added 0.4 percent. Ten-year Treasury yields decreased three basis points to 2.59 percent and the dollar fell versus 12 of its 16 most-traded peers. Cotton rose to a record and sugar reached a 29-year high. Oil surged to a six-month high of almost $84 a barrel.

The S&P 500 has surged 14 percent since Fed Chairman Ben S. Bernanke indicated in August that he was considering pumping more cash into the economy. The Fed will probably announce a plan to purchase at least $500 billion of long-term securities tomorrow, according to economists surveyed by Bloomberg News. The decision will follow today’s midterm elections in which Republicans are projected to gain control of the House.

“The market’s been climbing ever since Bernanke started talking about this on Aug. 27,” said Walter “Bucky” Hellwig, a Birmingham, Alabama-based senior vice president at BB&T Wealth Management, which oversees $17 billion. “As an investor, when you can buy something that you know someone else is going to buy at a higher price later, you go ahead and do it.”

‘All These Expectations’

Home Depot Inc., American Express Co. and Microsoft Corp. climbed at least 1.6 percent to lead the gain in the Dow Jones Industrial Average, which climbed during the session above its highest closing level since the week of Lehman Brothers Holdings Inc.’s bankruptcy in September 2008 before paring its advance. The Dow closed up 64.1 points, or 0.6 percent, to 11,188.72, the highest since April 26.

Today’s rally brought the S&P 500 to its highest closing level since May 3. U.S. stocks also gained as earnings at companies including MasterCard Inc. topped analyst estimates. MasterCard surged 2.9 percent. Almost 79 percent of the companies in the S&P 500 that reported results since Oct. 7 have surpassed analyst projections for per-share profit, according to data compiled by Bloomberg.

This week’s elections and Fed meeting will be followed by a government jobs report projected to show the U.S. unemployment rate held steady at 9.6 percent last month, near a 27-year high of 10.1 percent reached in October 2009.

“The Fed created all these expectations and it’s going to be hard for them to deliver; anything less than $500 billion in QE would be uncivilized,” said John Lynch, chief equity strategist at Wells Fargo Funds Management, which oversees $465 billion. He was referring to the bond-purchase tactic, which is known as quantitative easing. “I’m not really buying into this rally. It’s going to be hard to deal with the election, Fed policy and the jobs report all in the same week.”

Election Speculation

Republicans are poised to take control of the U.S. House and narrow Democrats’ margin in the Senate, delivering a rebuke to President Barack Obama amid voter anxiety over jobs and the economy. The Rothenberg Political Report predicts Republican gains of 55 to 65 seats in the House. The Cook Political Report puts Republican House gains at 50 to 60 seats, possibly higher. Both see Democrats losing six to eight seats in the Senate.

The S&P 500 has surged 48 percent on average starting in the second year of each U.S. presidential term, measured from its lowest level through the high the next year, according to data going back to 1928 compiled by Bloomberg. That compares with trough-to-peak gains of 38 percent in other years.

Election Year Returns

The index has advanced 15 percent on average in years when there was a Democratic president and Republican majority in Congress, the most of any combination, according to Strategas Research Partners.

Oil and gas shares led the gains in Europe, as BP Plc climbed 1.8 percent and BG Group Plc rose 3.4 percent after earnings at both companies beat analysts’ estimates. Danske Bank A/S, Denmark’s largest lender, rallied 5 percent as profit rose. The MSCI Emerging Markets Index advanced 0.4 percent.

The U.S. currency depreciated 1 percent to $1.4033 per euro. The Dollar Index, which tracks its performance against those of six of the nation’s trading partners, declined 0.7 percent.

Australia’s dollar rose to the highest level since it was floated in 1983, briefly trading above $1, as it strengthened against 15 of 16 major counterparts. Central bank Governor Glenn Stevens unexpectedly raised the overnight cash rate target a quarter point to 4.75 percent, saying the economy has “relatively modest amounts of spare capacity” and citing risk of “inflation rising again over the medium term.” It was the RBA’s first move in six months.

Commodities Rally

The S&P GSCI index of 24 commodities climbed 0.9 percent to its highest level in more than two years. Cotton futures for December delivery jumped by the exchange’s 5-cent limit to $1.3426 a pound, the highest price in 140 years of trading in New York. Raw sugar for March rose 2.3 percent to 30.12 cents a pound. Crude oil increased 1.2 percent to $83.90 a barrel, a six-month high in New York.

The Irish 10-year yield spread over bunds widened as much as 22 basis points, or 0.22 percentage point, to 484 basis points, the second consecutive all-time high, amid concern the nation will struggle to fund its budget deficit.

Ireland led an increase in the cost of insuring against losses on European government bonds, according to traders of credit-default swaps. Contracts on Ireland surged 24 basis points to close at a record 522, according to data provider CMA.

Irish Bond Trades

Traders in Irish government bonds may have to post bigger deposits, known as margins, when executing transactions through LCH.Clearnet Ltd. after the value of the securities plunged.

Trading may become more expensive because the yield spread between Irish 10-year government bonds and an index of AAA-rated euro-region debt has surpassed 450 basis points, said John Burke, head of fixed income at LCH in London. LCH will also gauge Ireland’s credit-default swaps and implied credit rating before deciding whether to increase margin requirements, he said, declining to specify those trigger levels.

The Greek-German yield gap increased 18 basis points to 833 basis points. The Portuguese yield premium rose 15 basis points to 377 basis points. The Spanish and Italian 10-year spreads over bunds also widened.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE