Oil Rises on Libyan Output Drop; Yen Falls, S&P 500 Gains

Oil rallied amid a drop in Libyan output and bets that central banks in America and Japan will maintain monetary stimulus. The yen weakened and European stocks fell while U.S. shares and Treasuries were little changed.

Brent crude oil climbed 2.5 percent to $109.61 a barrel, halting a three-day drop for the European benchmark, and West Texas Intermediate oil rose 0.9 percent to $98.68 a barrel. Japan’s currency slipped 0.3 percent to 97.71 per dollar. The Standard & Poor’s 500 Index closed up 0.1 percent at a record 1,762.11 after slipping 0.1 percent in the morning. The Stoxx Europe 600 Index ended 0.2 percent lower, erasing earlier gains. Spanish bonds advanced for the first time in three days.

The Federal Reserve, which starts a two-day policy meeting tomorrow, will probably refrain from tapering stimulus measures until March, according to a Bloomberg survey of economists. The Bank of Japan will continue to buy bonds until its inflation target is reached, Deputy Governor Kikuo Iwata said yesterday. Apple Inc., one of 12 companies in the S&P 500 due to release earnings today, retreated in extended trading after forecasting a first-quarter profit margin that may trail estimates.

“Investors are going to be overly focused on this Fed meeting,” Scott Wren, senior equity strategist in St. Louis for Wells Fargo Advisors LLC., which oversees about $1.3 trillion, said by phone. “I suspect that when the statement is released, there’s going to be very little change to it.”

Commodity Movers

Gasoline, gas oil, Brent crude and heating oil jumped more than 1.6 percent to lead gains in 14 of the 24 commodities tracked by the S&P GSCI Index, sending the gauge up 0.9 percent even as natural gas, corn, soybeans, coffee and wheat fell more than 1 percent.

Oil rallied after state-run National Oil Corp. said crude production in Libya, holder of Africa’s largest reserves, declined to about 250,000 barrels a day because of labor protests.

“The Libyan production drop is the main driver and is also the reason why Brent is stronger,” said Jacob Correll, a Louisville, Kentucky-based commodity analyst at energy management firm Schneider Electric Professional Services.

The yen slipped against 14 of its 16 major peers, weakening at least 0.3 percent against the Brazilian, New Zealand, Canadian and South Korean currencies. It dropped for a third day against the shared European currency, depreciating 0.2 percent to 134.68 yen per euro. The euro was little changed at $1.3789 after touching an almost two-year high of $1.3832 on Oct. 25.

‘Pushing Back’

“Market dynamics are still being driven by investors pushing back expectations of when the Fed may begin to taper,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Given the low yielding nature of the yen and the very aggressive easing policy that the BOJ’s implementing, that makes the yen still a very attractive funding currency. We’d expect that the yen will tend to underperform.”

The yield on 10-year Treasuries was up one basis point at 2.52 percent as the $32 billion sale of U.S. two-year notes today drew the highest demand since April. The Treasury plans to sell $35 billion of five-year securities tomorrow and $29 billion of seven-year debt the following day.

Factory production in the U.S. rose less than forecast in September, indicating a pause in manufacturing leading into the partial government shutdown in October. Output at factories rose 0.1 percent after a revised 0.5 percent gain in August that was smaller than initially estimated, Federal Reserve figures showed. The median forecast of economists in a survey called for a 0.3 percent September gain. Total industrial production, which includes output by mines and utilities, advanced 0.6 percent as higher temperatures drove up electricity use.

Home Sales

An S&P index of homebuilders slipped 0.4 percent, with eight of 11 stocks down. Contracts to buy previously owned homes declined in September for the fourth straight month as rising mortgage rates slowed momentum in the housing market. The index of pending home sales slumped 5.6 percent, exceeding all estimates in a Bloomberg survey of economists and the biggest drop in more than three years, after a 1.6 percent decrease in August, the National Association of Realtors reported.

The Federal Open Market Committee’s October meeting comes after U.S payrolls rose less than projected last month and a 16-day government shutdown took at least $24 billion out of the economy.

U.S. government bonds are acting more like equities than any time since before the credit crisis, making Treasuries a hidden risk to investors becalmed by the prospect of the Federal Reserve prolonging stimulus into 2014.

Treasuries, Stocks

Ten-year Treasuries are moving 0.024 percent for every one-percent change in the S&P 500 in the same direction, the first time that’s happened since July 2007, based on a risk measure known as beta. Prior to this month, the gauge averaged minus 0.12 over the past decade, meaning that bonds have historically moved in the opposite direction as stocks.

Treasuries are rising along with stocks as economists say the Fed will keep suppressing borrowing costs to support the world’s largest economy. While government debt was a haven as the U.S. endured the worst recession in seven decades, primary dealers such as Barclays Plc and Goldman Sachs Group Inc. say the gains this month show the Fed’s $85 billion of monthly bond purchases are masking the risk of owning fixed-income securities as the recovery in America takes hold.

Valuation Watch

This year’s rally in equities has pushed valuations on benchmark indexes in the U.S. and Europe to the highest levels in more than three years. The S&P 500 is up almost 24 percent in 2013, which would mark its biggest yearly gain since 2003. The benchmark gauge trades for 16.7 times reported earnings, the most since May 2010. The Stoxx 600 started today’s session at 20.8 times reported earnings and 14.8 times projected profit, the most expensive valuations since the end of 2009, according to data compiled by Bloomberg. The European gauge has rallied 14 percent this year following a 14 percent gain in 2012.

Among U.S. stocks moving today, Merck & Co. slid 2.6 percent to lead the Dow Jones Industrial Average down 1.35 points after reporting revenue that fell short of estimates. Dendreon Corp. jumped 11 percent as people familiar with the matter said the drugmaker is seeking a buyer.

Apple, the world’s biggest technology firm, climbed 0.7 percent at $529.88 in the regular session before tumbling 3.8 percent in extended trading at 4:30 p.m. after forecasting a profit margin for the first quarter that was below the average analyst estimate. Apple predicted a gross margin of 36.5 percent to 37.5 percent in the first quarter, compared with the average analyst estimate of 37.7 percent.

Small Caps

The smallest stocks are rallying almost twice as fast as bigger companies in the U.S., a bullish economic signal from businesses whose profits are most dependent on domestic demand.

Shares of companies from Rite Aid Corp. to Teledyne Technologies Inc. in the Russell 2000 Index have advanced 32 percent in 2013, compared with 19 percent for the Dow Jones Industrial Average. The spread is the widest for any year since 2003, according to data compiled by Bloomberg. Three of the last four times small-caps outperformed by this much, the economy grew faster the next year and stocks stayed in a bull market for another year or more, based on data from the past 34 years.

Gains in smaller companies that are more dependent on U.S. growth show investors are betting the world’s largest economy will pick up even after jobs growth slowed and the government shutdown weighed on gross domestic product. Smaller firms are surpassing analyst earnings estimates by more than Dow companies and are forecast to grow faster next year.

The Stoxx 600 fell for the third time in four days as automakers led declines. PSA Peugeot Citroen and Renault SA fell at least 3.7 percent. TNT Express NV climbed 4.3 percent as the Dutch package-delivery company reported an 85 percent decline in third-quarter earnings and said it will set up restructuring efforts.

Spanish Bonds

Spain’s 10-year securities rose, pushing the yield six basis points lower to 4.10 percent. The nation will pay out 16.2 billion euros of a maturing bond on Oct. 31 and 4.9 billion euros of interest, according to data compiled by Bloomberg.

The MSCI Emerging Markets Index rose for the first time in four days, advancing 0.7 percent. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong added 0.8 percent, rebounding from its worst week since June. Argentina’s Merval Index lost 1 percent after jumping as much as 2.3 percent. Brazil’s Ibovespa surged 1.7 percent and benchmark gauges in Poland, South Africa, South Korea and Taiwan increased at least 0.5 percent.

Malaysia’s ringgit rose 0.7 percent to the highest level since June against the dollar as it appreciated versus all 17 major peers after Prime Minister Najib Razak announced a goods and services tax to help cut the fiscal deficit. Indian stocks fell for a fifth day and the rupee weakened before a central bank policy meeting tomorrow.