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Stocks Gain on Report of Italy Talks With China; Treasuries Fall

BNP Paribas
Moody’s Investors Service may cut the ratings of BNP Paribas SA, Societe Generale SA and Credit Agricole SA this week because of their Greek holdings. Photographer: Fabrice Dimier/Bloomberg

U.S. stocks rose, reversing losses in the last 90 minutes, as concern about Europe’s debt crisis eased following a report that Italy was in talks with China about possible investments. Treasuries fell after the 10-year note yield reached a record low. The euro pared losses.

The Standard & Poor’s 500 Index rose 0.7 percent to 1,162.27 at 4 p.m. in New York. The 10-year note yield increased three basis points to 1.95 after touching an all-time low of 1.877 percent. The euro was little changed at $1.3662 and was down 0.4 percent versus Japan’s currency after slumping as much as 2 percent to a 10-year low of 103.9 yen. Silver and gold fell more than 2 percent to lead commodities lower.

Stocks recovered, with the S&P 500 erasing a 1.6 percent drop, after the Financial Times reported that Italy’s government was in talks with China Investment Corp. about “significant” purchases of Italian bonds and investments in strategic companies. Earlier losses were triggered by concern Greece was moving closer to default and a surge in yields at an Italian bond auction.

"The fact that the Chinese are coming in again is comforting," Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees $883 billion, said in a telephone interview. "The question for the markets will be -- is this enough for the depths of the endemic problems facing the European Union? Until we see an easing in credit markets, it’s going to be difficult to take advantage of good valuations."

Dow Rebounds

Intel Corp. and 3M Co. rallied more than 2 percent to lead gains in 21 of the 30 companies in the Dow Jones Industrial Average, which was lifted more than 200 points in the final 45 minutes of trading to close up 68.99 points, or 0.6 percent, at 11,061.12. Netlogic Microsystems Inc. surged 51 percent after Broadcom Corp. agreed to buy the maker of communications chips for $3.7 billion.

The S&P 500 wiped out its weekly advance on Sept. 9 after the European Central Bank said Juergen Stark resigned from the executive board, suggesting policy makers are divided over how to fight the debt crisis, while three German officials said Chancellor Angela Merkel’s government was debating how to shore up German banks should Greece default.

Earlier losses in global stocks threatened to pull the MSCI World Index into a bear market, or a slump of at least 20 percent from its latest peak. The global benchmark fell 1 percent today and is down 19 percent from its 2011 high in May.

‘Violent Swings’

The S&P 500 may slump as much as 21 percent as volatility continues, Bank of America Corp. technical analysts Mary Ann Bartels and Stephen Suttmeier wrote in a report today, saying that recent “violent swings” in prices were more typical of a bear market than a bull market. U.S. companies are earning too much for the bull market to be derailed, according to Laszlo Birinyi, the money manager who advised clients to buy shares before they bottomed in March 2009.

The Stoxx Europe 600 Index fell 2.5 percent and is trading at 9.1 times estimated earnings, its lowest price-earnings ratio since March 2009. European markets closed before the Financial Times reported of Italy’s talks about Chinese investments.

A gauge of bank shares slid 4.6 percent to the lowest level since March 2009 as BNP Paribas SA lost 12 percent, while Societe Generale SA and Credit Agricole SA plunged 11 percent after two people with knowledge of the matter said Moody’s Investors Service may cut the French banks’ ratings because of their Greek holdings.

‘Have the Means’

“Whatever the Greek scenario, and whatever provisions have to be made, French banks have the means to face it,” Bank of France Governor Christian Noyer said in an e-mailed statement today. “French banks have neither liquidity nor solvency problems.”

France’s CAC-40 Index sank 4 percent to the lowest level since April 2009. EDF SA, the French electricity producer, fell 2.9 percent following an explosion at a nuclear waste facility. A spokesman for EDF said there has been no radioactive or chemical leak following an explosion at the Marcoule nuclear waste facility in Le Gard, southern France.

Two-year U.S. notes also fell, sending their yield up four basis points to 0.21 percent. The yield on the 10-year German bund, Europe’s benchmark government security, declined to as low as a record 1.71 percent. The two-year bund yield rose after also dropping to a record earlier.

The Dollar Index, which tracks the U.S. currency against those of six trading partners, fell 0.1 percent after climbing as much as 0.8 percent. The yen strengthened against all 16 most-traded peers monitored by Bloomberg.

The Greek two-year yield surged 13 percentage points to a record of 69.55 percent, while the nation’s 10-year borrowing costs jumped 299 basis points to 23.54 percent, also a record.

Greek Austerity

Greek Prime Minister George Papandreou, vowing to avoid a default and stay in the euro, approved new measures yesterday to help plug a budget gap as resistance builds in Europe to extending more aid to the region’s most-indebted nation.

“We do think that there’s a very high probability that over the course of the next several months, Greece will default,” Jeffrey Palma, global equity strategist at UBS AG, said in an interview with Bloomberg Television. “Very briefly at the end of the summer we thought that policy had been moving in the right direction, but it’s pretty clear since then that things have deteriorated and so we’re back to an underweight position there.”

Italy Bonds

The Italian 10-year yield rose 17 basis points to 5.57 percent, even as the European Central Bank bought the nation’s government bonds today according to two people with knowledge of the transactions, who asked not to be identified because the deals are confidential. A spokesman for the Frankfurt-based ECB declined to comment.

The ECB said it spent more on government bonds last week as yields rose in Italy and Spain. The Frankfurt-based ECB said today it settled 14 billion euros ($19 billion) of bond purchases in the week through Sept. 9, up from 13.3 billion euros in the previous week. The ECB will take seven-day term deposits from banks tomorrow to absorb the 143 billion euros of liquidity created since its bond program started on May 10, 2010, a practice it employs to ensure the purchases don’t fuel inflation.

Italy sold 11.5 billion euros of Treasury bills, including 7.5 billion euros of one-year securities at an average yield of 4.153 percent, compared with 2.959 percent at an Aug. 10 auction. Demand was 1.53 times the amount on offer, compared with 1.94 times at the previous sale. The Treasury also sold 4 billion euros of three-month bills.

Debt Risk

European sovereign credit risk rose to records, with the Markit iTraxx SovX Western Europe Index of credit swaps on 21 governments jumping 18 basis points to 354. Contracts on Belgium rose 15 basis points to 294, French swaps increased 11 basis points to 189, Italy’s climbed 41 basis points to 506 and Spain’s were up 19 basis points at 431, according to CMA.

Greece’s chance of default in the next five years has soared to 98 percent as Papandreou fails to reassure international investors that his country can survive the euro-region crisis. It now costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million in advance Sept. 9, according to CMA.

The S&P GSCI Index of raw materials slipped 0.5 percent as 14 of 24 commodities retreated. Crude oil gained 1.1 percent to $88.19 a barrel.

The MSCI Emerging Markets Index lost 2.3 percent to its lowest closing level since Aug. 22. The Budapest Stock Exchange suspended trading in OTP Bank Nyrt. and FHB Bank Nyrt. as the government prepared to unveil a plan that may force lenders to take losses on foreign-currency mortgage loans.

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