S&P 500 Closes Near High on Fed Bets Amid Mixed Data; Oil Rises

Is the U.S. Stock Market Rally Running Out of Steam?
  • Treasuries stuck in tightest monthly trading range in decade
  • Measure of cross-asset volatility near lowest level this year

U.S. stocks closed near a record high after mixed data in the world’s largest economy bolstered speculation the Federal Reserve will be in no rush to raise interest rates. Oil climbed.

The dissonance of reports showing a surge in American new home sales and a slowdown in manufacturing brought into question the hawkish tone of recent comments from Fed officials, keeping the relative sense of calm across asset classes. The S&P 500 Index briefly topped its record closing high, while Treasury 10-year notes were stuck in the tightest monthly trading range since 2006. Oil rallied on speculation that Iran may be more willing to cooperate with other producers seeking to freeze output.

Market sentiment has seesawed in recent weeks as traders look for clues on how aggressive the Fed will be in its approach to tightening, while awaiting a speech from Chair Janet Yellen on Friday. The set of mixed economic data is dimming the outlook for the U.S. to diverge from increased monetary stimulus in Europe and Asia. There’s a 26 percent chance of a rate hike in September, according to data compiled by Bloomberg based on fed fund futures.

“We’re crawling toward another high, and it’s all about being in this sweet spot where everything is working well, but not overheating,” said Larry Peruzzi, managing director of international equities at Mischler Financial Group Inc. in Boston. “Now everybody’s looking to Yellen’s testimony on Friday.”

The Bank of America Merrill Lynch GFSI Market Risk Index, a measure of future price swings implied by options trading on global equities, interest rates, currencies and commodities, is close to the lowest level of 2016.

U.S. stock volatility hovered near a two-year low, while a similar gauge for Treasuries has tumbled from its June peak. Earlier this month, a JPMorgan Chase & Co. index tracking three-month currency swings fell to its lowest since late 2015.

Stocks

American equities showed signs of breaking out of a torpor, with Monsanto Co. leading a rally in raw-material shares as it’s said to be closer to a merger with Bayer AG. Chipmakers boosted the technology group, and Best Buy Co. surged 20 percent after surprising earnings. The S&P 500 rose 0.2 percent at 4 p.m. in New York.

The benchmark gauge has been moving within narrow ranges as investors assess valuations near the highest levels in more than a decade and signals from policy makers, while the earnings season winds down.

“We’re in the most aggressive dip-buying market I’ve ever seen,” said Brian Frank, a portfolio manager at Key Biscayne, Florida-based Frank Capital Partners LLC. “I wouldn’t even call the last two days a dip, but any little tiny decline seems to be an excuse to buy and talk about the Fed.”

European shares rose the most in two weeks as commodity producers rebounded on higher metals prices, and data pointed to continuing economic progress in the region. BHP Billiton Ltd. and Anglo American Plc led miners to the best performance of the 19 industry groups on the equity gauge as iron ore in China jumped to a two-week high.

Emerging-market shares halted a two-day slide as Brazil’s Ibovespa rose after the government signaled stepped up efforts to trim a budget deficit, fueling optimism that lawmakers will support measures aimed at restoring the country’s finances.

Bonds

Benchmark Treasury 10-year note yield was little changed at 1.55 percent, according to Bloomberg Bond Trader data. It hasn’t closed above 1.6 percent since June 23, the day the U.K. voted to leave the European Union. Investors turned even more neutral on Treasuries in the week ended Aug. 22, with both long and short positions declining, a JPMorgan Chase & Co. survey showed.

The Fed chief is scheduled to speak at an annual symposium in Jackson Hole, Wyoming, on Aug. 26, at a time when Vice Chairman Stanley Fischer and other Fed colleagues have stated that interest rates may still rise in 2016. Officials are trying to balance their desire to hike this year, following liftoff from near zero in December, with longer-term concerns that slowing global growth may prevent the policy rate from rising to levels seen in previous economic cycles.

"It’s the boring part ahead of Yellen," said David Keeble, New York-based head of fixed-income strategy at Credit Agricole SA. "The Fed can control the short end to some extent --that control has lessened with each promise they’ll hike which hasn’t been fulfilled. But if Yellen does give a firm signal we’ll get a rate hike fairly soon, perhaps September or December, we’ll definitely react.”

Tuesday’s $26 billion U.S. two-year note sale drew a yield of 0.76 percent. Direct bidders, non-primary-dealer investors that place bids with the Treasury, purchased 25.2 percent, the highest allocation since May and exceeding the 16.3 percent average at the previous 10 auctions.

The yield premium that investors demand for holding Italian 10-year debt instead of benchmark German bunds has widened from a four-month low reached on Aug. 15. Already struggling with sluggish growth and a banking crisis, Italy is heading for a referendum as Prime Minister Matteo Renzi attempts to overhaul the constitution.

Currencies

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.1 percent after dropping throughout most of the trading day. The greenback lost 0.1 percent to 100.24 yen, and rose 0.1 percent to $1.1306 per euro.

“The way investors are starting to get biased right now is that yes, maybe we get a little bit of a boost to the dollar from this one hike this year, but if the longer-term picture is still relatively benign, this supports risk sentiment” and works against the dollar, Vassili Serebriakov, a foreign-exchange strategist at Credit Agricole CIB in New York, said in a Bloomberg TV interview. “The bias is still for Yellen to be quite dovish, and if there’s a risk of a surprise, maybe it’s a little less dovish than more dovish.”

South Africa’s rand led losses in major currencies after the Daily Maverick said a police unit had ordered Finance Minister Pravin Gordhan to report to its offices on Thursday, raising concern the National Treasury chief may be replaced.

Commodities

Oil rose 1.5 percent higher after Reuters reported that Iran is sending "positive signals" that it may support joint action to bolster the oil market, citing unidentified sources in OPEC and the oil industry. Iran hasn’t decided whether to join any action, according to the sources. If OPEC and some other producers agree to cap output at informal talks next month, the resulting price boost may help other suppliers revive output, Goldman Sachs analysts wrote.

"This is just more jawboning," said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. "Iran, Iraq and Saudi Arabia are the OPEC members that everyone is listening to. The market will react to any news that comes from them."

West Texas Intermediate for October delivery rose 69 cents to settle at $48.10 a barrel on the New York Mercantile Exchange. Prices dropped as much as 1.7 percent earlier. Brent for October settlement climbed 80 cents, or 1.6 percent, to $49.96 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude closed at a $1.86 premium to WTI.

Gold futures for December delivery advanced 0.2 percent to settle at $1,346.10 an ounce at 1:54 p.m. on the Comex in New York. The metal lost 1 percent in the previous two sessions.

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