Rags to Riches

[BlackThought]

Stocks Rout Halts, Euro Advances as Risk Demand Stabilizes

U.S. stocks jumped, halting a weeklong global slide, while the euro rose for a third day and Treasuries erased an early gain on speculation the rout in risky assets overshot the potential damage from Europe’s debt crisis.

The Standard & Poor’s 500 Index climbed 1.5 percent to 1,087.69 at 4 p.m. in New York, erasing a morning drop of 1.5 percent that dragged the gauge below its weakest level during the May 6 crash. Brazil’s Bovespa index surged 3.6 percent, while copper jumped the most since February on signs of stronger demand in China. Currencies of commodity producing nations rallied versus the dollar. The 30-year Treasury yield rose one basis point to 4.1 percent after earlier dropping to 3.98 percent, its lowest level of the year.

The expiration of U.S. stock options added to market swings after the S&P 500 yesterday tumbled 3.9 percent, the most in more than a year. Financial shares in the S&P 500 rose 3.6 percent as a group as the Senate’s passage of legislation to reform the industry eased uncertainty surrounding the makeup of the new rules.

“Technically speaking we’re very oversold -- really that’s the understatement of the year,” said Walter Todd, who helps manage about $800 million at Greenwood Capital in Greenwood, South Carolina. “I’d rather be buying now than I would three weeks ago.”

Rebound After Correction

Today’s gain in the S&P 500 came after the benchmark index for U.S. stocks slumped yesterday to its lowest level since February as an unexpected increase in jobless claims and a surprise drop in the Conference Board’s index of leading economic indicators called into question the strength of the economic rebound.

The S&P 500 opened today trading at about 15.5 times the reported operating earnings of its companies over the past 12 months, the lowest valuation since July. The index erased its gain in the final hour of trading, only to rally 1.5 percent in the session’s final 20 minutes.

The rally that began 14 months ago is probably intact if history is any guide, Birinyi Associates Ltd. said. The S&P 500 fell 12 percent from a 19-month high on April 23 through yesterday as concern grew that Europe’s sovereign debt crisis would snuff out the global economic recovery.

Thirteen of 15 comparable drops the Westport, Connecticut- based firm calculated since 1945 have occurred either at bear market bottoms or during lasting advances.

‘First Official Correction’

“If we assume the bull market ended on April 23rd, it would be one of the weakest and shortest gains in the last 48 years,” Cleve Rueckert, an analyst at the research and money- management firm founded by Laszlo Birinyi, wrote in a note to clients today. “A more likely scenario is that the current bull market is experiencing its first official correction.” A correction is typically defined as a drop of at least 10 percent from a high.

JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. rallied at least 4.5 percent to pace gains in 77 of 79 stocks in the S&P 500 Financials Index.

The U.S. Senate brought Congress to the brink of passing the most comprehensive regulation of the financial industry since the Great Depression. Senators approved restrictions on proprietary trading by banks and a consumer protection agency designed to prevent lending abuses. The legislation was approved by a 59-39 vote yesterday and requires reconciliation with a bill passed by the House of Representatives in December.

The legislation provides a mechanism for liquidating financial institutions that until recently were considered too big to fail. It also establishes a council of regulators monitoring threats to the economy and specific restraints on the trading of derivatives.

‘Not as Onerous’

“It’s an enormous document -- the devil will be in the details,” said David Katz, chief investment officer at Matrix Asset Advisors Inc. in New York, which manages $1.2 billion. “The early read is that it’s not as onerous as some feared.”

Europe’s benchmark index trimmed losses, while still sliding to the lowest since Nov. 3., on lingering concern that the region’s governments lack a common position on how to resolve the debt crisis. The Stoxx Europe 600 Index closed down 0.5 percent after sinking as much as 2.9 percent during the day. The gauge tumbled 4.6 percent this week, while the S&P 500 lost 4.2 percent.

The euro climbed to its highest level in a week against the dollar amid speculation investors who bet on its decline had to buy back the currency as it strengthened for a third day. The euro rose 1.8 percent since May 14 to cap its largest weekly gain in eight months after yesterday rebounding from a four-year low as traders theorized the European Central Bank may intervene to support the currency. German lawmakers today approved their country’s share of a $1 trillion euro-region bailout.

Bovespa Rallies

Brazil’s Bovespa rose for the first time in seven days as commodity producers surged after the measure fell to the cheapest level in more than a year. The Bovespa’s 19 percent drop from an April high dragged it to 11 times analysts’ earnings estimates yesterday, the lowest level in 13 months.

Copper futures for July delivery climbed 11.65 cents, or 4 percent, to $3.061 a pound in New York, the biggest gain for a most-active contract since Feb. 16.

Inventories monitored by the Shanghai Futures Exchange fell for a third straight week, the longest slide since October. China imported 309,772 metric tons last month, the second- biggest amount since June, the government said. Before today, copper dropped 6 percent this week on European debt concerns.

Gold Retreats

Gold fell in New York, capping the biggest weekly loss in five months, as some investors sold to lock in gains after a rally to a record a week ago. Gold futures for June delivery lost as much 1.1 percent to $1,176.10 an ounce on the Comex in New York. The metal slumped 4.2 percent this week, the most since the five days to Dec. 11.

Crude oil for July delivery dropped 76 cents to settle at $70.04 a barrel on the New York Mercantile Exchange. The July contract has fallen for nine consecutive days, losing 13 percent since May 10. Prices slipped 7.1 percent this week.

The U.S. dollar weakened against 11 of 16 major counterparts, with the Brazilian real, New Zealand dollar and Australian dollar climbing at least 1.7 percent. The yen fell against 15 of 16 major currencies, while lose 2.4 percent against the South Korean won.

The MSCI Asia Pacific Index of stocks slumped 1.3 percent. Honda Motor Co., which gets about 81 percent of its sales from overseas, declined 2.5 percent in Tokyo. Sonic Healthcare Ltd., which provides medical tests, tumbled 20 percent in Sydney after saying earnings will be less than forecast.

The cost to protect against defaults on U.S. corporate bonds retreated, trading in a benchmark credit derivatives index shows. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, slipped 6.3 basis points to a mid-price of 119.33 basis points.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5ewXALKTwQM&pos=1