U.S. stocks surged, reversing most of yesterday's plunge, and Treasuries sank as an unexpected drop in jobless claims and higher-than-estimated earnings tempered concern the economy is slowing as Europe's debt crisis widens. The Swiss franc slid on plans to temporarily peg it to the euro.
The Standard & Poor's 500 Index jumped 4.6 percent to 1,172.64 at 4 p.m. in New York. The Stoxx Europe 600 Index rallied 3.2 percent, rebounding from a two-year low. Treasuries extended losses as demand weakened at an auction of 30-year bonds, sending the benchmark 10-year note yield up 22 basis points to 2.32 percent. The franc slid at least 4.8 percent against all 16 major peers. Gold retreated from a record above $1,800 an ounce, while zinc and lead rallied.
The S&P 500 rebounded after plunging 18 percent from July 22 through yesterday amid concern about Europe's debt crisis and a political battle over the U.S. debt ceiling that prompted S&P to cut the country's credit rating. Both European shares and the Russell 2000 Index of small American companies entered a bear market this week, falling at least 20 percent from their previous highs, as two and 10-year Treasury yields reached record lows.
"If there is no recession, stocks are discounting an awful lot of bad news right now," Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which oversees $3.8 billion, said in a telephone interview. "The jobless claims report is another indication that the economy is growing at a moderate pace. Still, the market is very fragile. So much of what's moving the market is centered in Europe," he said. "Is this is a repeat of the 2008 financial crisis? I don't think so."
U.S. equity futures erased losses before markets opened today after first-time applications for jobless benefits decreased 7,000 in the week ended Aug. 6 to 395,000, the fewest since early April. Economists forecast 405,000 claims, according to the median estimate in a Bloomberg News survey. The Labor Department said the number of people on unemployment benefit rolls and those getting extended payments also dropped.
Cisco Systems Inc. rallied 16 percent, the most in nine years, as the world's largest maker of networking equipment reported profit that topped estimates after the company cut jobs and pared its businesses. News Corp. jumped 17 percent for its biggest gain since October 2008 as the owner of Fox television and the Wall Street Journal reported better- than-estimated earnings and increased its dividend 27 percent, cushioning investor losses stemming from a phone-hacking scandal at its London paper News of the World.
The Dow Jones Industrial Average rallied 423.37 points, or 4 percent, to 11,143.31 after sliding almost 520 points yesterday.
JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. rallied more than 6 percent to pace a rebound in banks as all 81 financial shares in the S&P 500 advanced. The group sank to a two-year low on Aug. 8.
Concern the economy is slowing as Europe's debt crisis spreads has overshadowed a second-quarter reporting season that has seen per-share earnings top estimates at three-quarters of the 429 companies in the S&P 500 that reported results since July 11. Net income has increased 16 percent for the group on a 13 percent surge in sales, data compiled by Bloomberg show.
A rout in global equity markets since July 26 erased $7.9 trillion in market value through yesterday and made stocks in Europe and the U.S. the cheapest relative to earnings in about 2 1/2 years. Central bankers are trying to restore investor confidence, with the Federal Reserve pledging to keep interest rates near zero through at least mid-2013 to bolster U.S. growth and the European Central Bank buying bonds to cap borrowing costs.
Companies in the S&P 500 started today's session trading at 11.3 times estimated profits, near the cheapest since March 2009. Europe's Stoxx 600 was valued at 9.1 times projected earnings.
The slide in equities has sent executives at banks and investment firms scrambling to halt the spread of panic.
Bank of America Corp. Chief Executive Officer Brian T. Moynihan said yesterday the lender will meet its capital targets because economic conditions are "so much better" than they were during the financial crisis in 2008-2009. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told CNBC yesterday that the fundamental strength of the economy is "still here." Bank of America's shares are down 53 percent from their 2011 high in January, while JPMorgan has lost 25 percent from a February peak.
Brian Rogers, chairman and chief investment officer of T. Rowe Price Group Inc., warned in an e-mail to investors last night that "emotional responses to financial downturns rarely produce good results."
"While we're experiencing a perfect storm of political dysfunction, slowing economic growth, and the debt downgrade, the market backdrop is very different from that of 2008 when we were truly in the crosshairs of a global financial crisis," Rogers wrote to investors with the company, which had $521 billion under management as of July 26. "The sharp decline has been so sudden that I believe a good portion of the decline is behind us. Nonetheless, markets will remain volatile."
More executives at S&P 500 companies are buying their stock than any time since the depths of the credit crisis after valuations plunged 25 percent below their five-decade average.
Sixty-six insiders at 50 companies bought shares between Aug. 3 and Aug. 9, the most since the five days ended March 9, 2009, when the benchmark index for U.S. equities reached a 12- year low, according to data compiled by Bloomberg. Morgan Stanley Chief Executive Officer James Gorman and two other managers purchased 175,000 shares of the New York-based bank as the stock fell to the lowest level since March 2009, according to filings with the U.S. Securities and Exchange Commission.
Today's gains in stocks and drop in Treasuries pulled the S&P 500's dividend yield back below the rate on the 10-year Treasury. The dividend payout, currently at 2.22 percent, rose above the 10-year yield for the first time since May 2009 yesterday, according to data compiled by Bloomberg.
Even as bank stocks rallied today, the cost to protect against a default by a U.S. lender rose and a benchmark gauge of corporate credit risk reached a 14-month high amid fear that Europe's debt crisis will infect the global financial system.
Credit-default swaps on Bank of America, the nation's biggest lender, surged to the highest since April 2009 before paring the gain. The cost to protect against defaults by European financial companies reached a record, and a swaps index that gauges the perceived risk of owning junk bonds, which falls as sentiment deteriorates, is at about the lowest level in more than a year.
Banks in the Stoxx 600 climbed 3.9 percent as a group, reversing an earlier tumble that dragged them to the lowest level since April 2009. Societe Generale SA rose 3.7 percent after tumbling 9.1 percent earlier and 15 percent yesterday. The French bank is among lenders being targeted by investors because of its perceived dependence on short-term funding, analysts said.
France's top credit ratings were affirmed yesterday by all three major rating firms amid concern the country's creditworthiness was in doubt, and Societe Generale issued a denial of "all market rumors" as its stock slumped.
"The mix of euro doubts and rating fears in recent days and weeks may have dented the confidence of funding counterparties, which has then fed back into equity markets," Royal Bank of Scotland Group Plc analysts including Stefan Stalmann said in note to clients today.
U.S. Treasuries retreated after the 10-year real yield, which accounts for inflation, dropped to negative 1.45 percent yesterday, approaching the lowest since 2008. The 30-year Treasury 30-year bond yields rose 26 basis points to 3.77 percent as demand waned at today's auction of the debt.
The first auction of the securities since S&P cut the U.S. credit rating on Aug. 5 produced a yield of 3.750 percent, compared with the average forecast of 3.622 percent in a Bloomberg News survey of eight primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.08, compared with an average of 2.64 at the past 10 sales. Yesterday's auction of 10-year debt drew a record low yield.
"People didn't show up for this one," said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, one of 20 primary dealers that trade directly with the Federal Reserve. "The Fed fixing the Fed funds rate for two plus years provided a lot of support for the front and intermediate parts of the curve, but it increases inflation expectations because there is concern that the fed is tying their hands further if inflation worries arise."