Stocks Rally as Credit Markets Rebound With Crude Ahead of Fed

Stocks Rally Ahead of Fed's Rate Decision
  • U.S. and European shares lead revival in world stock gauge
  • Two-year Treasury yields jump to 5-year high on Fed outlook

Global equities climbed, junk-bond funds rallied the most in a year, and the selloff in crude oil abated as investors piled into riskier assets a day before the Federal Reserve is anticipated to end seven years of near-zero interest rates.

The Standard & Poor’s 500 Index capped its first back-to-back gains since Nov. 3, and European equities rallied the most in 10 weeks to drive a gauge of worldwide stocks to their first advance since Dec. 4. Exchange-traded funds that track high-yield corporate debt rebounded, while U.S. crude climbed past $37 a barrel. Yields on two-year Treasury notes climbed to a more-than five-year high, while the dollar extended its advance.

The tension in global financial markets eased somewhat a day before the Fed is expected to boost borrowing costs and indicate to investors that any subsequent hikes will be gradual as long as economic growth remains steady. The first increase in four days in junk bonds and crude oil’s rebound from a six-year low helped quell concern that a selloff in riskier assets would derail the global recovery just as the Fed starts to tighten policy.

“The Fed will be comfortable with a rate hike tomorrow,” said Brian Jacobsen, who helps oversee $242 billion as the chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “I don’t think they want to show they’re beholden to the whims and fancies of traders, so they’ll probably still plow ahead with the plan to hike. But they’ll certainly want to convincingly signal that they’re going to follow a very shallow path in future rate hikes.”

Stocks

The S&P 500 added 1.1 percent to 2,043.41 as of 4 p.m. in New York, extending a 0.5 percent advance from Monday that erased a 1.9 percent rout on Friday. Data Tuesday reinforced expectations for a progressive increase in rates, with the cost of living holding steady in November, underscoring scant inflation that is well below the Fed’s goal.

BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, the largest exchange-traded fund of its kind, and SPDR Barclays High Yield Bond ETF both advanced for the first time in four days after touching six-year lows on Monday amid anxiety over the junk-debt market. 

Tuesday’s rally cut the S&P 500’s slide in December to 1.8 percent. While the month historically has been one of the best of the year, the index is headed for its worst December in 13 years and the biggest annual drop since 2008.

The probability the Fed will boost its benchmark rate come Wednesday was 76 percent, according to futures data compiled by Bloomberg. Traders are pricing in less than three increases of 0.25 percentage point in the next year, taking the fed funds effective rate to 0.76 percent from 0.14 percent.

The Stoxx Europe 600 Index jumped 2.9 percent from a 10-week low, with Germany’s DAX Index and France’s CAC 40 among the biggest gainers, rising at least 3.1 percent. The Stoxx 600 is still down 6.7 percent this month, on course for its worst December since 2002 amid a rout in commodities, concern over the outlook for U.S. monetary policy and disappointment over the extent of European stimulus.

In Asia, losses in Japan dragged the MSCI Asia Pacific Index down 1 percent, even as shares from South Korea to Taiwan rallied. Mining companies led Australia’s S&P/ASX 200 Index to a sixth straight daily decline.

Bonds

Treasuries fell, pushing 10-year yields to their highest level in more than a week, as demand for fixed income assets globally slumped after equities rebounded with oil prices. Rates on policy-sensitive two-year Treasuries added two basis points to 0.97 percent, the highest close since May 2010.

As the Fed moves closer to raising rates, Treasury yields are showing inflation expectations among investors are approaching a six-year low. The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities has narrowed to 1.51 percentage points from 1.55 percentage points a month ago.

German bonds declined as demand for the securities as a haven investment eased. Ten-year bund yields jumped eight basis points, or 0.08 percentage point, to 0.66 percent, pushing its two-day increase to eight basis points. Italy’s 10-year bond yield rose six basis points to 1.69 percent.

The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, narrowed the most since October after touching a three-year high on Monday.

The cost of insuring corporate debt in Europe declined after jumping the most in more than two months on Monday amid concerns sparked by funds suspending redemptions. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies fell one basis point to 82 basis points.

Commodities

Oil advanced after slumping to the lowest level since February 2009 amid concern over a global glut in the commodity. West Texas Intermediate crude rallied 2.9 percent to $37.35 a barrel, after sinking to as low as $34.53 last session, its weakest level in more than six years. Brent crude climbed 1.4 percent to $38.45, ending its longest run of losses in more than a year.

U.S. natural gas extended its losses, dropping to the lowest level in 14 years as forecasts showed above-average temperatures were set to persist this month.

Currencies

The greenback rose versus the euro and the yen as bond yields climbed before the Fed’s rate decision. The Bloomberg Dollar Spot Index, a gauge of the U.S. currency versus 10 major peers, climbed a fourth straight day, adding 0.3 percent.

Traders are looking past the anticipated first rate increase and contemplating a landscape of relatively low borrowing costs in the U.S. for years to come. The dollar gauge has surged 11 percent in the past year as the Fed moved toward ending its era of near-zero borrowing costs while policy makers in Europe and Japan continue to carry out unprecedented economic stimulus.

The dollar added 0.6 percent to $1.0923 per euro, after dropping as much as 0.8 percent earlier in the session, and gained 0.6 percent to 121.70 yen.

Emerging Markets

The MSCI Emerging Markets Index rebounded from a six-year low, rising for the first time in 10 days. Equity benchmarks in Russia, Turkey and Thailand rallied more than 1.8 percent on Tuesday.

The stock gauge has slumped 18 percent this year, leaving it poised for the worst annual drop since 2011. In comparison, the MSCI World Index of developed-country shares has fallen 3.7 percent. 

Emerging-market currencies gained Tuesday as oil halted its selloff and speculation grew that the dollar’s gains this year leave it vulnerable to a short-term selloff should the Fed pull the trigger on a rate hike.

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