U.S. Stocks Erase Gains; Europe Shares, Italy Bonds Rise

U.S. stocks erased gains in the final minutes of trading as investors prepared for rebalancing of benchmark indexes and the Senate voted to keep $85 billion of spending cuts in place. European stocks and Italian bonds climbed for a second day, while oil slid to a 2013 low.

The Standard & Poor’s 500 Index slipped 0.1 percent to 1,514.68 at 4 p.m., erasing an earlier rally of as much as 0.6 percent and trimming its February gain to 1.1 percent. The Stoxx Europe 600 Index added 1 percent and capped a ninth straight monthly advance, the longest streak since 1997. The yield on 10-year Italian bonds fell eight basis points to 4.73 percent, while the euro weakened against 12 of 16 major peers. Gold slipped for a second day and oil retreated to its lowest level of the year. U.S. Treasuries rose.

Stocks reversed course after the Dow Jones Industrial Average earlier climbed to within 16 points of its record closing level set in 2007. MSCI Inc. made changes to global and U.S. equity indexes at the close of trading, a process known as rebalancing that can lead to swings in affected stocks. The rally also fizzled as the Senate rejected plans to replace automatic spending spending cuts set to begin tomorrow.

“It was nothing more than the index rebalancing at the end of the day as well as maybe some portfolio adjustments at the end of the month,” Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., said by e-mail. His firm oversees about $80 billion. “We have had a nice run so far this year. Investors could be locking in some gains into month end.”

Market Movers

Volume for S&P 500 stocks was 1.5 percent below the 30-day average and trading in Dow Jones Industrial Average stocks was 5.2 percent lower, data compiled by Bloomberg show.

Wal-Mart Stores Inc., UnitedHealth Group Inc. and Procter & Gamble Co. led the Dow down 20.88 points to 14,054.49 after earlier climbing as high as 14,149.15.

Limited Brands Inc., the owner of Victoria’s Secret chain, rose 2.3 percent after profit jumped. J.C. Penney Co. tumbled 17 percent after saying its net loss widened to $552 million. Sears Holdings Corp., the retailer controlled by hedge-fund manager Edward Lampert, slumped 5.2 percent after posting a fourth-quarter loss that was larger than it forecast. Herbalife Ltd. jumped 7.6 percent after agreeing to add two board members chosen by Carl Icahn and allow him to boost his stake to as much as 25 percent.

U.S. equities followed European shares higher earlier as government reports bolstered optimism in the economy.

GDP Data

Gross domestic product in the U.S. grew at a 0.1 percent annual rate, up from a previously estimated 0.1 percent drop, revised figures from the Commerce Department showed. Jobless claims decreased by 22,000 to 344,000 in the week ended Feb. 23, the Labor Department said. The median forecast of 44 economists surveyed by Bloomberg called for 360,000 applications.

Senators rejected a pair of partisan plans to replace the automatic spending cuts, turning back a Democratic proposal, 51-49, and a Republican plan, 38-62, with 60 votes required for each measure.

No additional congressional action is planned before the start of the cuts, to be split between defense and non-defense spending. The across-the-board reductions will total $1.2 trillion over nine years, with $85 billion set to take effect in the remaining seven months of this fiscal year.

‘Little Worried’

The late-day retreat in stocks is “people just positioning before sequestration,” Frank Ingarra, head trader at Greenwich, Connecticut-based NorthCoast Asset Management LLC, said in a telephone interview. His firm oversees $1.4 billion. “People on the sidelines are a little worried so that makes sense.”

Treasuries rose for the first time in three days, with the yield on 10-year notes falling two basis points to 1.88 percent. The across-the-board cuts due to start in March may lower gross domestic product by 0.6 percentage point and cost 750,000 jobs by the end of 2013, the Congressional Budget Office said this month.

The effects of the so-called sequester will be temporary and replaced in the second quarter by a broader, long-term package of spending cuts and revenue increases, S&P predicted in a report today.

“The good news is that, in Standard & Poor’s Ratings Services’ view, the underlying momentum in our economy will help it withstand these drags on growth,” S&P said. “The bad news is that if these budget cuts kick in, the economy would slow unnecessarily, at least for a while.”

European Movers

The Stoxx 600 extended yesterday’s 0.9 percent advance for the biggest two-day gain since the beginning of the year. Bayer AG climbed 2.7 percent to a one-month high after the German chemical maker forecast increasing sales this year. Royal Bank of Scotland Group Plc slid 6.6 percent as Britain’s biggest taxpayer-owned lender posted a wider full-year loss.

Italy’s 10-year bond yield has dropped more than 16 basis points in the past two days after jumping 41 basis points on Feb. 26, following the inconclusive election results. The securities capped their first monthly decline since July.

“There is speculation that Italy will form a coalition and the market is taking that as positive news,” said Martin Munksgaard, a bond trader at Danske Bank A/S in Copenhagen. “It might not be a perfect situation but it’s far better than the alternative. Berlusconi might not be as big a threat as the market had feared, and European leaders will continue to put pressure on Italy to reform.”

Spain’s 10-year bond yield fell 13 basis points today to 5.10 percent, compared with the 5.15 percent level at the close on Feb. 22. The yield on benchmark German bunds was little changed at 1.45 percent.

Yen’s Slide

The yen capped a fifth monthly decline against the dollar, the longest run since August 2008. It weakened 0.5 percent 92.69 per dollar today after Prime Minister Shinzo Abe nominated Asian Development Bank President Haruhiko Kuroda to become Bank of Japan governor, raising the prospect of more stimulus this year. Abe also named economics professor Kikuo Iwata and BOJ official Hiroshi Nakaso as deputy governor candidates.

The S&P GSCI gauge of 24 commodities slid 0.3 percent, set for monthly drop of 4 percent, the most since October. Gold slipped 1.1 percent to $1,578.10 an ounce, falling for a fifth straight month for the longest slump since 1997. West Texas Intermediate lost 0.8 percent to $92.05 a barrel, down almost 6 percent this month. Aluminum, silver, lead, nickel and copper all lost at least 0.7 percent today

The MSCI Emerging Markets Index gained for a second day, climbing 0.8 percent. The Shanghai Composite Index advanced 2.3 percent as property developers rallied after China Vanke Co.’s profit beat analyst estimates. Benchmark gauges in Hungary, the Czech Republic, South Africa, Turkey, the Philippines, Indonesia and South Korea jumped at least 1 percent.

India’s Sensex slid 1.5 percent, with trading volume 144 percent higher than the 30-day average, as Finance Minister Palaniappan Chidambaram signaled record borrowing in his budget speech today.

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