U.S. Stocks Surge as Worries Ebb Over Health of European Banks

  • Deutsche Bank rebounds on speculation of lower settlement
  • S&P 500 posts best quarterly gain in 2016, led by technology

U.S. stocks rallied, with the Dow Jones Industrial Average rising more than 160 points, as worries over the health of European banks diminished after a report said Deutsche Bank AG is nearing a less-costly settlement with regulators than investors feared.

Relief swept over equities as Agence France-Presse reported the German lender is near a $5.4 billion deal with the Justice Department, less than half an initial request, to settle a probe related to bad mortgages. Financial shares in the S&P 500 Index jumped the most in eight weeks, after falling yesterday to the lowest since Aug. 2. Costco Wholesale Corp. increased the most in more than two months to boost consumer-staples companies after its earnings beat estimates.

The S&P 500 rose 0.8 percent to 2,168.27 at 4 p.m. in New York, posting a fourth consecutive quarterly gain and the strongest this year. The index closed near its average price during the past 50 days. The Dow rose 164.70 points, or 0.9 percent, to 18,308.15 today. The Nasdaq Composite Index added 0.8 percent. About 7.6 billion shares traded hands on U.S. exchanges, 15 percent higher than the three-month average.

“There’s a little bit of recognition of the reality that Deutsche Bank is not Lehman,” John Stoltzfus, chief market strategist at Oppenheimer & Co. in New York, said by phone. “The banks, as a result of all the regulatory changes since the world crisis, are in better shape to withstand this. The other side is that we’re coming to the quarter end, and people are beginning to realize that September was not as bad as many thought it was.”

Concerns about weakness among European banks and the potential impact on the global economy have buffeted markets, with the Dow lurching by triple digits in every session this week for the first time since January. Despite today’s rally, the S&P 500 closed with a second-straight monthly drop, down 0.1 percent. The CBOE Volatility Index wiped out a September climb, sliding 5.2 percent today to 13.29.

The main U.S. stocks benchmark posted a 3.3 percent third-quarter gain, its best this year, bolstered by technology shares as the group capped the strongest period since 2013. Financial stocks rose 4 percent, while industrials added 3.6 percent as American Airlines Group Inc. and United Continental Holdings Inc. soared more than 27 percent since June.

Deutsche Bank wiped out a 9 percent drop in German trading Friday to rise 6.4 percent after the AFP report. Its shares tumbled to a record low yesterday as a Bloomberg News report signaling growing concern among some of the lender’s clients exacerbated pressure caused by the DOJ’s initial demand for $14 billion to settle the probe. Chief Executive John Cryan told staff in a memo Friday the bank’s balance sheet is safer than at any point in the past two decades.

Bank Worries

Commerzbank AG said yesterday that it will cut one in five jobs, suspend dividends and shrink securities trading in a bid to cut costs, while ING Groep NV is reported to be planning to announce thousands of job cuts next week. In the U.S., the future of Wells Fargo & Co. Chief Executive Officer John Stumpf looks tenuous after an intense grilling by lawmakers over the unauthorized-account scandal.

“It’s not just the potential risk in Deutsche Bank, there are now lots of concerns about the global banking system and the risk spilling out of European banks,” said Michael Ingram, a market strategist at BGC Partners in London. “We have a very connected financial system. A zombie financial system at some point translates into a zombie economy.”

While markets calmed after the Federal Reserve’s decision last week to leave rates unchanged, some central-bank officials have since publicly endorsed a rate hike in the near-term. Traders are now pricing in a 58 percent chance of higher borrowing costs in December.

Data Watch

With policy makers watching for signs of stronger inflation, a report today showed the Fed’s preferred measure picked up, rising 1.7 percent from a year earlier, though it still lags the central bank’s 2 percent target. Consumer spending was little changed last month as income growth cooled, while the gain in personal income was the weakest since a decline in February. A separate report showed consumer confidence rose in September for the first time in four months.

Investors are also awaiting quarterly reports from corporate America. Alcoa Inc. unofficially kicks off the next earnings season in less than two weeks, and analysts forecast profit at S&P 500 members fell 1.5 percent in July-September period, which would mark a sixth consecutive decline.

In Friday’s trading, eight of 11 main industries in the S&P 500 gained as the benchmark returned to within 1 percent of a record set on Aug. 15. Financial companies rose 1.4 percent to reverse nearly all of a 1.5 percent loss yesterday, while energy and health-care shares advanced more than 1 percent. Utilities fell for a sixth day, the longest losing streak in seven weeks.

Banks Rally

Banks jumped the most in almost two months, with Citigroup Inc. and Bank of America Corp. rallying at least 3.1 percent. In the broader financial group, Morgan Stanley and Charles Schwab Corp. added more than 2.8 percent.

Semiconductors were among the day’s leaders as the group finished with the strongest quarterly advance in seven years, rising 18 percent. Qualcomm Inc. gained 1.6 percent today, extending its climb since June to 28 percent, the best since 2010. The shares jumped Thursday on a report it’s considering purchasing NXP Semiconductors NV in a deal that would be valued at about $30 billion. Nvidia Corp. climbed 46 percent in the quarter, the most in a decade.

Consumer staples rose for the third time in four days, trimming the worst quarterly slide in five years. Wal-Mart Stores Inc. jumped 2 percent, and Procter & Gamble Co. gained 1.7 percent to an eight-month high following Costco’s better-than-forecast earnings.

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