Wednesday, August 24, 2011

World stocks, oil, gain on stimulus hopes

NEW YORK: World stocks rallied, oil rose and the dollar slipped on Tuesday, Aug 23 on speculation the Federal Reserve may signal more stimulus is ahead for the U.S. economy.

More dismal U.S. economic data helped spur the expectations, which boosted world stocks as measured by the MSCI All-Country World Index 2.4 percent and the U.S. benchmark Standard & Poor's 500 3.4 percent.

Financial markets have been in turmoil for the past month on concerns the United States may be headed for another recession and as the euro zone's debt crisis has worsened.

Steep recent losses have put the MSCI All-Country World Index and S&P 500 on track for their worst month since 2008, after the collapse of Lehman Brothers.

A report showing China's factory sector held up better than expected in August helped boost world shares overnight.

A magnitude 5.9 earthquake that struck the U.S. East Coast and Canada, forcing evacuation of some buildings, had very minimal impact on markets.

In the latest disappointing news on the U.S. economy, factory output in the U.S. central Atlantic region contracted again in August and new home sales fell to a five-month low in July.

Manufacturing, which had been among the strongest sectors in the U.S. recovery, has become an area of concern. Last Thursday, the Philadelphia Fed said an index covering factory activity in its region dropped to a near 2-1/2 year low in August.

Equity investors are taking a "bad news is good news" approach, though, betting the Fed could step in with help again. Stocks staged a rally in the fourth quarter of last year, when the Fed announced a $600 billion bond-buying program.

Speculation is widespread in financial markets that Fed Chairman Ben Bernanke will use his speech on Friday at a central banker conference in Jackson Hole, Wyoming, to signal a new monetary offensive to support the faltering U.S. economy.

"The market is really geared up for the idea of additional asset purchases to at least be put on the table when Bernanke speaks," said Brian Dolan, chief strategist at in Bedminster, New Jersey. "I'm not sure it will play out that way, but that's what the market is betting on now."

Some analysts say Bernanke is more likely to outline gradualist measures, which would disappoint those looking for a big bang approach such as a fresh round of bond buying, already dubbed QE3.

The Fed chairman looks set to discuss ways the central bank could tweak the Fed's balance sheet as a means to put further pressure on medium and long-term interest rates and anchor them at low levels. These could be implemented in September and October at coming Fed meetings.

On Wall Street, the Dow Jones industrial average gained 322.11 points, or 2.97 percent, to end at 11,176.76. The S&P 500 was up 38.53 points, or 3.43 percent, at 1,162.35. The Nasdaq Composite Index added 100.68 points, or 4.29 percent, to 2,446.06.

U.S. stocks briefly trimmed gains after the earthquake. No major damage or injuries were reported in the event.

The FTSEurofirst 300 index of top European shares ended up 0.8 percent.

Stimulus measures like those previously undertaken by the Fed increase the amount of dollars in the system, driving down the currency's value, which helps U.S. exports but prompts investors to seek higher returns elsewhere.

The dollar edged down 0.4 percent against a basket of currencies.

In the oil market, prices rose on the stimulus hopes, as well as continued violence in Libya and planned disruptions to Nigeria's oil exports.

Brent October crude rose 95 cents to settle at $109.31 a barrel. On the New York Mercantile Exchange, crude for October delivery settled at $85.44, gaining $1.02, or 1.21 percent.

Gold prices retreated from their first-ever foray above a record $1,900 an ounce in the sharpest one-day drop in 18 months as rebounding equities prompted traders to rethink a bullion rally which many now see as overdone.

The precious metal fell almost $90 from a record high $1,911.46 overnight.

"Gold has reached that point where it moves $40-$50/ounce in a moment's notice. That is not an investment that is safe, indeed it is far from safe; it is violent; it is mass psychology incarnate and it is scary," wrote Dennis Gartman in The Gartman Letter.

Spot gold fell 3.7 percent to $1,826.60, its biggest one-day percentage loss since February 2010.

The sharp rally in stocks caused traders to pare Treasuries holdings.

The benchmark U.S. 10-year note was last down 13/32 in price, its yield edging up to 2.15 percent from 2.11 percent late on Monday.


Ongoing fears over European banks' exposure to heavily indebted European nations like Greece and Italy are making it more expensive for banks to fund themselves in short-term funding markets.

U.S. bank debt costs are also being pressured in unsecured bond markets. The cost for interbank borrowing -- measured by three-month Libor, or the London interbank offered rate -- rose to 0.31178 percentage point on Tuesday.

European banks are facing higher dollar funding costs as U.S. money fund investors, nervous about exposure to peripheral euro zone countries, reduce the length and amount of loans to banks in the region.

The Thomson Reuters Peripheral Euro Zone Banks Index ended down 1.1 percent at 51.61 and is down 25 percent year-to-date. - Reuters

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