Stocks, Commodities Rally as Treasuries Drop on BudgetMichael Shanahan and Inyoung Hwang
U.S. stocks surged, sending the Standard & Poor’s 500 Index to its biggest rally in a year, and commodities jumped after Congress passed a bill averting most of the tax increases and spending cuts threatening the recovery in the world’s biggest economy. Treasury yields gained.
The S&P 500 rose 2.5 percent to 1,462.42 at 4 p.m. in New York and has increased 4.3 percent in the past two sessions. The Stoxx Europe 600 Index climbed 2 percent to the highest since February 2011 as equities added to last year’s 13 percent global rally. Industrial metals led commodities up and oil advanced to a three-month high. The Dollar Index reversed an early slide, while Treasury 10-year yields climbed eight basis points.
President Barack Obama said he will sign into law the bill undoing tax increases for more than 99 percent of households as Republicans vowed to fight him for spending cuts in exchange for raising the debt ceiling. An industry report today showed American manufacturing expanded in December at a pace that shows the industry is stabilizing after reaching a three-year low a month earlier.
“Short-term, a deal is good for the market,” Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., said by telephone. His firm oversees about $80 billion. “Long-term, more has to be done in the way of spending cuts before we can declare victory.”
Gauges of telephone, technology and financial companies climbed at least 2.9 percent to lead gains as all 10 of the S&P 500’s main industry groups jumped, sending the gauge to its highest level since Sept. 14. Hewlett-Packard Co., Caterpillar Inc. and AT&T Inc. advanced more than 3.8 percent to lead the Dow Jones Industrial Average up 308.57 points to 13,412.71 for its biggest gain since June.
The S&P 500 rose 1.7 percent on Dec. 31, the biggest end-of-year increase since 1974, in anticipation of a budget deal. The benchmark index rallied 13 percent in 2012, its best year since 2009 when markets began recovering from the bear market that followed the U.S. financial crisis. The S&P 500 is 0.2 percent below an almost five-year high set in September and needs to rise 7 percent to surpass the all-time record of 1,565.15 reached in October 2007.
The Chicago Board Options Exchange Volatility Index, known as the VIX, fell 19 percent to 14.68 in New York today. It slumped 35 percent in two days, the most ever. VIX futures trading rose to a record 221,323 contracts today, surpassing the previous high reached Dec. 31, according to the CBOE Futures Exchange.
The Institute for Supply Management’s manufacturing index climbed to 50.7 last month from November’s 49.5, which was the weakest since July 2009. Fifty is the dividing line between expansion and contraction. The median forecast of economists surveyed by Bloomberg called for a rise to 50.5.
“We’re catching up to where we would’ve been had we not had the fiscal cliff drama,” James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion, said in a telephone interview. “We’re revaluing the market based on what’s closer to the underlying economy and most of the economic reports have been pretty good.”
The House’s 257-167 bipartisan vote breaks a yearlong impasse over how to head off $600 billion in tax increases and spending cuts that would have started taking effect yesterday. While avoiding most of the immediate pain, the measure is only one step toward curbing the federal deficit. The issue will return with a February fight over raising the $16.4 trillion debt limit.
Under the plan, households making less than $450,000 per year would be spared an income tax-rate increase. The wealthy would see a rise in their top rate, to 39.6 percent, from 35 percent. The top tax rates on capital gains and dividends would go up to 23.8 percent, from 15 percent last year.
For an individual with $10,000 invested in the S&P 500, dividends after taxes would fall to $167.64 a year from $187 at today’s payout rate. An investor who sells shares at a $5,000 profit would face capital gains obligations of about $1,190 compared with $750 in 2012.
All 19 industry groups in the Stoxx 600 advanced during the year’s first trading session. The European benchmark jumped 14 percent last year, the biggest increase since 2009. Rio Tinto Group led a rally in mining companies today, rising 5.1 percent. Porsche SE and Volkswagen AG climbed more than 3 percent to pace gains in automakers.
Euro-area manufacturing output contracted more than initially estimated in December, adding to signs a recession in the currency bloc may extend as leaders struggle to tackle the sovereign-debt crisis. A gauge of manufacturing in the 17-nation euro area fell to 46.1 from 46.2 in November, London-based Markit Economics said. That’s below an initial estimate of 46.3 on Dec. 14. A reading below 50 indicates contraction.
The cost of insuring against default on European bank debt dropped, with the Markit iTraxx Financial index of credit-default swaps linked to 25 banks and insurers falling 15 basis points to 127.
The MSCI Asia Pacific excluding Japan Index gained 2.1 percent, the highest since August 2011. Equity markets in Japan and mainland China were closed today and tomorrow for public holidays.
Developing-nation stocks rose the most since September, with the MSCI Emerging Markets Index adding 2.1 percent and the MSCI BRIC Index of the largest emerging markets surging 2.6 percent and extending its gain from a low in June to 22 percent.
Eighteen of 24 commodities tracked by the S&P GSCI Index advanced, sending the measure up 0.8 percent. Lead, aluminum, nickel and copper jumped at least 3.5 percent. Oil futures in New York climbed 1.4 percent to $93.12 a barrel.
A Chinese manufacturing gauge showed a third month of expansion yesterday. The Purchasing Managers’ Index was 50.6 in December, the National Bureau of Statistics and China Federation of Logistics and Purchasing said. That compares with the 51.0 median estimate in a Bloomberg News survey of analysts and 50.6 in November. A reading above 50 indicates expansion.
China will “step up efforts to promote strong, sustainable and balanced growth in the world economy,” President Hu Jintao said in a New Year’s Eve address broadcast on state media. China achieved stable economic development in 2012 and will seek to do the same this year while making restructuring of its growth model a focus, he said.
The Dollar Index, a gauge of the currency against six major peers, increased 0.1 percent after losing as much as 0.6 percent. The currency strengthened 0.1 percent to $1.3185
The dollar weakened against 12 of its 16 major peers. The yen also slid as investors sought higher-yielding assets and Japanese Prime Minister Shinzo Abe reiterated his intention to weaken the nation’s currency. Japan’s currency fell against 15 of 16 major peers, trading near a two-and-a-half-year low versus the dollar.
Treasury 10-year note yields climbed eight basis points to 1.84 percent, the highest since September on a closing basis. The yield on similar-maturity German debt jumped 13 basis points to 1.44 percent while Britain’s 10-year rate climbed 16 basis points to 1.99 percent, the largest gains since September for both.
The world’s leading economies will have $220 billion less sovereign debt to refinance in 2013, cutting supply after every major government bond market rallied for the first time since the 2008 financial crisis.
The amount of bills, notes and bonds coming due for the Group of Seven nations plus Brazil, Russia, India and China will drop to $7.38 trillion from $7.60 trillion in 2012, according to data compiled by Bloomberg. Japan, the U.K., Germany, France, Italy and Brazil will see a decline, while the U.S., Canada, Russia, India and China will face an increase.