U.S. Stocks Rise Amid Earnings as Dollar, Bonds Fluctuate on GDP

EghtesadOnline: U.S. stocks rose amid speculation a stronger economy may boost corporate earnings, while the dollar held near a seven-month high on bets interest rates will rise this year and a sell-off in bonds eased.

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28 October 2016

American equities advanced as General Electric Co. added to deal optimism, while earnings from Alphabet Inc. and Chevron Corp. overshadowed a rout in health-care shares. The greenback was set for a fourth weekly advance as traders boosted wagers on a Federal Reserve hike in December. Treasury yields were little changed near the highest level since May. Crude dropped as an OPEC committee meets in Vienna to discuss output quotas for members participating in an agreement to cut production, reports Bloomberg.

Traders have boosted bets on higher U.S. rates this year amid better-than-estimated economic reports and as investors reconsider how much longer major central banks will maintain their stimulus programs. American growth picked up in the third quarter after an uninspiring first half of the year as a build in inventories and a soybean-related jump in exports helped cushion softer household spending. The data are in sync with the views of policy makers that the economy is making slow and steady progress. The odds of a hike in December are now at 74 percent, according to Fed fund futures data compiled by Bloomberg.

“This confirms further the acceleration in the economy that will give the Fed further confidence to raise rates in December,” said Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ U.S. intermediary business. “It was good to see some additional contributions to GDP from something other than the consumer -- we’ve been looking for that to broaden the growth and it looks like we got some signs of that here in the third quarter.”

Stocks

The S&P 500 rose 0.3 percent to 2,138.61 at 11:38 a.m. in New York, after dropping for a third session on Thursday.

Equities shook off an early lack of direction amid dueling reports from Amazon.com Inc. and Alphabet. The Google parent rallied 2.5 percent toward a record, while Amazon fell the most in four months on a disappointing outlook. Chevron surged on its first profit in a year, and Exxon Mobil Corp. slipped after extending its streak of profit declines. Health-care shares slumped as AbbVie Inc. and Amgen Inc. dropped more than 6.9 percent, and drug distributor McKesson Corp. plunged 23 percent, the most since 1999.

“I don’t think these earnings in and of itself can push us to new highs when we have two big things looming, with an election in two weeks and two fed meetings,” said Mark Kepner, managing director and equity trader at Themis Trading LLC in Chatham, New Jersey. “Those two things hanging over the market, with earnings that are just ‘okay,’ are not enough to really get the market moving higher.”

Stocks have struggled to gain momentum since a record reached in August. The S&P 500 has been stuck in a range of about 65 points since then as the looming presidential election and expectations for higher interest rates upstage a recovery in corporate profits. As one of the busiest weeks of the earnings season draws to a close, 78 percent of the gauge’s firms that reported this season beat profit projections and 59 percent topped sales estimates. Analysts expect a slight earnings contraction for the quarter, data compiled by Bloomberg show.

An avalanche of earnings announcements added to concerns about the health of European companies, with the region’s shares falling for a fifth straight day as equity funds continued to lose money. Slumps at Novo Nordisk A/S and Anheuser-Busch InBev NV after they cut their forecasts dragged down the Stoxx Europe 600 Index down 0.3 percent.

Currencies

The Bloomberg Dollar Spot Index, which measures the U.S. currency’s performance against a basket of 10 major counterparts, fell 0.1 percent, leaving its weekly gain at 0.3 percent. The gauge is up 2.3 percent this month.

The focus of investors will shift to the Federal Open Market Committee’s meeting on Nov. 1-2, a jobs market report scheduled for Nov. 4 and the U.S. presidential election on Nov. 8. The probability that the Fed will tighten policy at its meeting in December rose from 68 percent a week ago. The central bank raised its rate target in December 2015 for the first time in nearly a decade.

“Good economic growth data from the U.S. and the positive details associated with this report keep the Fed in the frame for December,” said Shaun Osborne, chief foreign-exchange strategist in Toronto at Bank of Nova Scotia. “The data support our broadly positive view of the U.S. dollar.”

The yen was set for its biggest monthly loss since May amid speculation the Bank of Japan will maintain monetary stimulus as the Fed prepares to raise interest rates. Meanwhile, the greenback fell against the euro as the common currency got a boost from German inflation accelerating at the fastest pace in two years in October.

Elsewhere in the world, Brazil’s real led declines among the world’s major currencies as a rout in commodities overcame positive sentiment generated by a repatriation law that’s expected to raise government revenue through back taxes and fines. The lira weakened to an all-time low as a pause in easing by Turkey’s central bank failed to offset mounting speculation the Fed will raise interest rates this year. The yuan headed for the biggest monthly drop since last year’s shock devaluation, spurring concern that China’s policy makers are becoming more tolerant of declines as exports slump and the dollar advances.

Bonds

The benchmark Treasury 10-year note’s yield was little changed at 1.85 percent, based on Bloomberg Bond Trader data.

Bonds worldwide have lost 2.9 percent in October, according to the Bloomberg Barclays Global Aggregate Index, on course for their worst month since May 2013. A survey of investors by Bank of America Corp. showed cash holdings match the highest levels since the terror attack on the U.S. on Sept. 11, 2001.

“I’m increasing my cash position now,” said Enna Li, who manages a bond portfolio in Taipei for Mirae Asset, which oversees $93 billion globally. “The U.S. election is a big uncertainty.” Li said she holds 10 percent in cash, versus the usual allocation of 3 percent to 5 percent.

German bonds headed for their worst month since 2013 as a global selloff deepened amid speculation major central banks are moving closer to reining in stimulus. Italy’s 10-year bonds declined for a third day, pushing up yields to the highest level since U.K.’s Brexit vote in June, as the Treasury in Rome sold 8.5 billion euros of debt.

Commodities

Oil slid as much as 1.3 percent in New York. Brazil will attend the Organization of Petroleum Exporting Countries gathering Saturday in Vienna as the bloc that controls about 40 percent of world production seeks non-member cooperation on reducing output. Brazil will join other producers from outside the group, including Russia. OPEC may agree on a collective cut and postpone “difficult decisions” on individual quotas, analysts Bassam Fattouh and Amrita Sen wrote in an Oxford Institute for Energy Studies report.

"OPEC is expected to kick the can down the street," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "There will probably be a wishy-washy, watered-down statement that says little. Iraq, OPEC’s second-biggest producer, wants to join Libya, Nigeria and Iran in being exempt from cuts, which makes it very difficult."

West Texas Intermediate for December delivery slipped 1 percent to $49.24 a barrel on the New York Mercantile Exchange. Brent for December settlement dropped 0.8 percent to $50.07 a barrel on the London-based ICE Futures Europe exchange.

Industrial metals rose on signs of economic improvement in the U.S. and China. Price gains will cheer industry executives and investors meeting next week for the London Metal Exchange’s annual LME Week gathering.