U.S. Stocks Gain With Commodities as Dollar Index Weakens

U.S. stocks and commodities rallied and the Dollar Index fell for the third time in four days amid speculation the Federal Reserve will maintain its pace of monetary stimulus until economic growth picks up.

The Standard & Poor’s 500 Index increased 0.6 percent to 1,640.42 after the benchmark gauge posted its first consecutive weekly declines since November. The Dollar Index, a gauge of the currency against six major peers, slid 0.8 percent to 82.681. The 10-year Treasury yield was little changed at 2.13 percent after earlier climbing as high as 2.19 percent. Nickel and silver surged more than 2 percent and oil rallied 1.6 percent to pace commodity gains. Turkey’s stocks, bonds and currency slid amid anti-government protests.

Fed Bank of Atlanta President Dennis Lockhart said in a Bloomberg Television interview that central bank officials are committed to record stimulus measures even as divergent views of when to reduce bond purchases create a “mixed message.” U.S. manufacturing unexpectedly contracted in May at the fastest pace in four years, according to an Institute for Supply Management report. Commerce Department data showed construction spending increased 0.4 percent in April, less than half the median pace predicted by economists in a Bloomberg survey.

“In terms of the Federal Reserve, we can now say with even more confidence that there is literally zero chance the Fed announces any adjustments to its QE program in June,” Dan Greenhaus, chief global strategist at broker-dealer BTIG LLC, wrote in a note to clients. “It’s too soon to wonder whether ‘bad news is good news’ again but we hope today’s report is not the start of a trend.”

Dollar Weakens

The U.S. currency weakened against 15 of 16 major peers as the yen strengthened beyond 100 per dollar for the first time in almost a month. The Aussie dollar jumped 1.9 percent to 97.54 U.S. cents before a Reserve Bank of Australia policy meeting tomorrow. The rand rallied 2.8 percent versus the dollar, rebounding from a four-year low.

Global bond markets posted their biggest monthly losses in nine years in May, with the over $40 trillion of securities in the Bank of America Merrill Lynch Global Broad Market Index falling 1.5 percent on average, led by a 2 percent drop in Treasuries.

Thirty-year Treasury bonds increased today, sending yields down two basis points to 3.26 percent. Two-year rates slipped less than one basis point to 0.29 percent.

Concern that Fed stimulus is poised for a reduction is taking a bigger toll on confidence in bond markets than stocks, based on options trading.

Equity Volatility

Indexes that measure expected volatility in equities are diverging by the most in a year compared with Treasuries, according to data compiled by Bloomberg. Bank of America Merrill Lynch’s MOVE Index, which tracks option projections for swings in U.S. government debt, climbed 62 percent to 79.99 in May. That’s three times the monthly increase for the Chicago Board Options Exchange Volatility Index of S&P 500 contracts, the data show.

Consumer staples, energy and technology companies led gains among all 10 of the main groups in the S&P 500 today.

Merck & Co. and Bristol-Myers Squibb Co. jumped more than 3 percent as the companies’ new experimental drugs showed promise. Intel Corp. surged 4 percent after FBR Capital Markets upgraded the chipmaker’s shares. F5 Networks Inc. slid 4.9 percent after Morgan Stanley cut its rating on the maker of data-management equipment.

The S&P 500 sank 1.1 percent last week, paring its 2013 advance to 14 percent. The index is down about 1.7 percent from a closing record on May 21 as investors debate what the Fed’s next move will be.

‘Healthy’ Pullback

“We view the pullback as healthy within the framework of the long-term uptrend,” Katie Stockton, chief market technician at Stamford, Connecticut-based MKM Partners, wrote in note yesterday. “Our intermediate- and long-term momentum indicators remain supportive of the uptrend. Initial support is near 1,600, and our long-term target remains 1,780.”

The S&P 500 has risen for seven straight months which, combined with its strong start to the year, may indicate further gains for stocks in June, according to Sam Stovall, S&P’s New York-based chief equity strategist.

A seven-month winning streak has happened 13 times since 1945 and it has led to advances of 0.4 percent on average in the eighth month as stock prices rose 62 percent of the time, Stovall wrote in a note today. The S&P 500’s advances in January and February may also help as the benchmark U.S. equity index has returned annual gains in each of the 26 years with such a positive start since World War II. The strong starts to the year have been followed by increases of 1 percent in June compared with its normal flat performance.

‘Upside’ Surprise

“Could sell in May have started in the end of the month, rather than the usual? One could easily infer that from the performance of the last three days,” the strategist wrote. “However, history says, but does not guarantee, that the S&P 500’s performance in June could surprise to the upside.”

The Stoxx Europe 600 Index fell 0.8 percent today, trimming a drop of as much as 1.2 percent.

Roche Holding AG sank 3.7 percent, the most since 2011, after a study showed that its Avastin drug failed to extend the lives of patients with a type of brain cancer. Munich Re and Hannover Re slipped at least 2.8 percent, leading reinsurers lower, as storms across central Europe caused rivers to swell, flooding Prague. Polymetal International Plc added 1.9 percent after JPMorgan Chase & Co. raised its rating on the shares.

The cost of insuring corporate bonds with credit-default swaps rose for a fourth day, to the most since April 26. The Markit iTraxx Europe Index of swaps linked to 125 investment-grade companies increased four basis points to 108 basis points.

Emerging Markets

Japanese shares fell, with the Topix index deepening its correction, as Nomura Holdings Inc. paced declines among brokerages and a stronger yen weighed on exporters’ earnings outlook.

The Topix lost 3.4 percent to 1,096.95 at the close of trading in Tokyo, with all of its 33 industry groups falling. The gauge is down 14 percent from its recent high on May 22. The index sank 2.5 percent in May, its first monthly drop since August. Measures of real estate companies and brokerages, the two Topix industry groups that led the rally from November, have fallen more than 25 percent from recent highs.

Emerging Markets

The MSCI Emerging Markets Index lost 0.7 percent, extending last month’s 2.9 percent drop. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong sank 0.5 percent. India’s Sensex slid 0.8 percent after factory output in May fell to the lowest level in 50 months. Russia’s dollar-denominated RTS Index slipped 0.9 percent as manufacturing slowed, while Brazil’s Ibovespa rebounded 0.8 percent after slumping 5.1 percent last week.

The yield on Turkey’s two-year notes jumped 71 basis points to 6.78 percent, the biggest increase on record, and the lira declined for a fifth day, while the nation’s benchmark equity index tumbled 10 percent, the most since 2003. Clashes in Istanbul began May 31 and continued late yesterday in Ankara and Istanbul as protesters took to the streets calling for Prime Minister Recep Tayyip Erdogan to resign.

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