Stocks Rebound on Earnings; Dollar Slumps

By Rita Nazareth and Nikolaj Gammeltoft - Oct 20, 2010 9:11 PM GMT+0100

The dollar slid the most against the euro since July and reached a 15-year low versus the yen amid speculation the Federal Reserve will pump more cash into the economy. Boeing Co. and Yahoo! Inc. helped lead stocks higher after earnings beat estimates, while energy shares and oil rose.

The dollar snapped a three-day rally against the euro, losing 1.6 percent to $1.3950 versus the common currency, and sank to as low as 80.85 yen. The Standard & Poor’s 500 Index increased 1.1 percent to 1,178.17 at 4 p.m. in New York after slumping 1.6 percent yesterday for its biggest drop in two months. Oil rebounded from its largest drop since February, returning above $81 a barrel. The yield on the 30-year Treasury bond slipped three basis points to 3.89 percent.

The Fed’s Beige Book business survey today said the U.S. economy grew at a “modest pace” with little sign of acceleration last month, fueling speculation central bankers may undertake further measures to support growth. Boeing and Yahoo joined 84 percent of S&P 500 companies that have topped analyst earnings estimates since Oct. 7, boosting optimism that profits are improving even as the economic recovery slows.

“The tenor of the Beige Book confirms that the economy remains stuck in a low gear, while the good news is that there’s only limited downside,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $63 billion. “With U.S. growth already weak and the Fed poised to pump more money into the system, there’s additional downward pressure on the dollar.”

Dollar Slides

The dollar weakened against 15 of 16 major peers, losing at least 1.5 percent versus currencies including the Australian dollar and Swedish krona. The U.S. currency has depreciated more than 3 percent versus all 16 major counterparts since the end of August, falling more than 10 percent versus the euro and Australian dollar, as speculation grows that the Fed will buy more Treasuries in a tactic known as quantitative easing.

“It’s quantitative easing and the dollar debasement that’s the predominant story,” said Jeremy Stretch, executive director of foreign-exchange strategy at CIBC World Markets in London.

U.S. stocks advanced following yesterday’s slide triggered by China’s interest-rate increase and concern banks will need to buy back more bad mortgages.

‘Sky Is Not Falling’

Boeing rallied 3.4 percent after reporting profit of $1.12 a share, more than the average estimate of $1.07 in a Bloomberg survey. Yahoo rose 2 percent after the most-visited U.S. Web portal late yesterday said third-quarter net income more than doubled to $396.1 million, or 29 cents a share. Wells Fargo & Co., the largest U.S. home lender, climbed 4.3 percent after saying it’s “eager” to return cash to shareholders following a record quarterly profit.

“We’ve had a variety of company earnings reports which indicate that the sky is not falling,” said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $350 billion. “Yesterday was a dark day for the market because of macro factors. Today it will be company management teams’ turn to lead the way again.”

The pound lost 0.8 percent against the euro and weakened against 10 of its 16 most-traded peers after the Bank of England’s Monetary Policy Committee, led by Governor Mervyn King, voted 7-1-1 to keep the benchmark interest rate at 0.5 percent and the bond-purchase plan at 200 billion pounds ($314 billion). Andrew Sentance pushed for an increase in the rate to 0.75 percent, while Adam Posen voted to boost the asset-purchase plan by 50 billion pounds.

‘Potent Weapon’

King said in a speech yesterday that some gauges of U.K. inflation are “extremely subdued,” signaling that he may be open to stepping up bond purchases. He also said that monetary policy remains a “potent weapon.” Chancellor of the Exchequer George Osborne detailed the deepest budget cuts ever in Britain, eliminating 500,000 public-sector jobs and imposing a levy on banks to extract the “maximum sustainable” revenue, outlining plans in Parliament today to virtually eliminate the 156 billion-pound deficit.

Three stocks rose for every two that fell in the Stoxx Europe 600 Index, which increased 0.3 percent. Peugeot climbed 0.9 percent as the carmaker said quarterly revenue grew and raised its full-year outlook. BASF rose 2.6 percent in Germany after the world’s biggest chemicals maker said recovering markets helped lift its third-quarter profit beyond analysts’ estimates.

The yield on Ireland’s 10-year bond increased seven basis points to 6.31 percent. The difference in yield, or spread, between Portuguese and German 10-year bonds increased 11 basis points to 3.29 percentage points, while the Greek-German yield gap was one basis points narrower at 6.58 percentage points.

Commodities Rally

Corn futures rose for the first time in six sessions as a weaker dollar improved prospects for grain exports from the U.S., the world’s largest grower and shipper. Corn for December delivery rose 5 percent to $5.735 a bushel on the Chicago Board of Trade, after falling 5.7 percent during the prior five sessions.

Oil advanced 2.9 percent to $81.77 a barrel after falling 4.3 percent yesterday, the biggest decline since Feb. 4.

Gold futures for December delivery rose $8.20, or 0.6 percent, to settle at $1,344.20 on the Comex in New York. Copper rebounded from the biggest drop in three months, with December futures climbing 3.6 cents, or 1 percent, to settle at $3.7935 a pound in New York.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net