Thursday, July 22, 2010

Stocks slide, bonds rally on Bernanke's outlook

NEW YORK: Global stocks slid on Wednesday, July 21 as investors poured money into safe havens such as bonds after Federal Reserve Chairman Ben Bernanke said the U.S. economy faces "unusually uncertain" prospects, adding to worries about the recovery.

Bernanke's downbeat economic assessment slammed U.S. stocks even after Morgan Stanley and Apple Inc easily beat Wall Street's expectations. The Wall Street bank and the tech bellwether, known for its iPhone and iPad, were the latest U.S. corporations to turn in solid results in the second-quarter reporting season.

Stocks sold off after Bernanke acknowledged the U.S. labor market's continued weakness during the first day of his semiannual testimony to members of Congress. Economic conditions will warrant exceptionally low interest rates for an "extended period," Bernanke said.

The yield on the 10-year U.S. Treasury note touched a near 15-month low and the yield on the 30-year Treasury bond posted its biggest one-day drop in 6-1/2 weeks as investors scooped up government debt, driving a furious rally. Bond yields move inversely to price.

The scramble for long-dated bonds resulted in a brief narrowing in the gap between two-year and 10-year yields to 230 basis points, the tightest since late September 2009.

MSCI's all-country world equity index pared gains to trade almost 0.3 percent lower after European shares closed more than 1 percent higher.

Wall Street ended more than 1 percent lower.

"We are now giving up on the notion of a standard recovery in the U.S. economy," said Joe Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania.

"The market sold off because unfortunately there is no remedy provided in Bernanke's commentary to the rising threat of deflation, the excess capacity in the economy and the malfunctioning of the credit system," Battipaglia said.

The Dow Jones industrial average closed down 109.43 points, or 1.07 percent, at 10,120.53. The Standard & Poor's 500 Index fell 13.89 points, or 1.28 percent, at 1,069.59. The Nasdaq Composite Index slid 35.16 points, or 1.58 percent, to 2,187.33.

Asian stocks had advanced on Apple's strong earnings and on hopes that China may roll back policy tightening measures later this year. The MSCI index of Asia Pacific ex-Japan stocks gained 0.7 percent, Japan's Nikkei average inched down 0.2 percent.


Investors have been reluctant to make big commitments in equities due to growing worry about the economy, sparked by a recent slew of disappointing economic data.

To be sure, the benchmark S&P 500 found support on Wednesday at its 14-day moving average and held above 1,060, a level seen as critical by some technical analysts.

The euro fell sharply against the dollar while the yen rallied after Bernanke testified.

"The market was looking for some form of concrete action from Bernanke, a commitment to do something. All we got was that they're aware of the risks and are prepared to take as yet unspecified actions," said Brian Dolan, chief currency strategist at in Bedminster, New Jersey.

"Reaction is basically turning into a spasm of despair," Dolan added.

The dollar was up against a basket of major currencies, with the U.S. Dollar Index up 0.68 percent at 83.306.

The euro was down 0.90 percent at $1.2768. Against the yen, the dollar was down 0.55 percent at 87.02.

Bernanke's testimony before the Senate Banking Committee jolted the bond market from its earlier slumber.

The benchmark 10-year U.S. Treasury note was up 21/32 in price to yield 2.88 percent.


Oil prices fell from a 3 1/2-week high after data showed U.S. crude inventories unexpectedly rose last week, but a tropical weather system approaching the Gulf limited losses.

Commercial U.S. crude inventories rose 360,000 barrels in the week to July 16 to 353.46 million barrels, against a forecast stocks would be down 1.4 million barrels, the U.S. Energy Information Administration reported.

U.S. crude oil for September delivery fell $1.02, or 1.31 percent, to settle at $76.56 a barrel.

Despite Bernanke's gloomy outlook, copper rallied to its highest level in more than three weeks as strong physical and Chinese buying, and another hefty drawdown in inventories, pointed to a tighter supply/demand balance.

Copper prices have risen about 5 percent in July -- the first rebound in four months -- helped by better demand from top industrial metals buyer China, falling stockpiles, a firmer euro versus the dollar and stronger equity markets. - Reuters

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