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Stocks, Commodities Rally; Dollar Drops on Budget Deal

January 2, 2013
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By Michael Shanahan, Copyright 2013 Bloomberg.
 

Stocks and commodities surged after U.S. lawmakers passed a bill averting spending cuts and tax increases threatening a recovery in the world’s biggest economy. The dollar weakened as yields on Treasury 10-year notes rose the most since October.

The Standard & Poor’s 500 Index advanced 1.2 percent and the Stoxx Europe 600 Index jumped 2.1 percent at 9:31 a.m. in New York, the highest since March 2011, as equities added to last year’s 13 percent global rally. Copper gained more than 3 percent and oil rose almost 2 percent. The Dollar Index fell as much as 0.6 percent, its biggest decline since Nov. 23. Treasury 10-year yields climbed eight basis points.

President Barack Obama said he will sign into law the bill undoing tax increases for more than 99 percent of households as Republicans vowed to fight him for spending cuts in exchange for raising the debt ceiling. Manufacturing in the U.S. probably expanded in December, showing the industry is stabilizing after reaching a three-year low, economists said before a report.

"It’s an immediate positive and a short-term relief that they got the deal through," Binay Chandgothia, a Hong Kong based portfolio manager at Principal Global Investors, which oversees more than $250 billion in assets worldwide, said in a phone interview. "The sustainability will depend on what comes out ultimately and how things shape up with the debt ceiling debate. There will now be protracted political negotiations."

Bipartisan Vote

The House of Representatives’ 257-167 bipartisan vote breaks a yearlong impasse over how to head off $600 billion in tax increases and spending cuts that would have started taking effect yesterday.

The S&P 500 jumped 1.7 percent on Dec. 31, the biggest end- of-year gain since 1974, in anticipation of a budget deal. The Institute for Supply Management’s factory index rose to 50.4 in December from the previous month’s 49.5, which was the lowest since July 2009, according to the median forecast of 68 economists surveyed by Bloomberg before a report at 10 a.m. in New York. A reading of 50 marks the dividing line between expansion and contraction.

The U.S. measure isn’t the grand bargain on deficit reduction lawmakers wanted when they created the tax-and- spending deadlines over the past three years. While avoiding most of the immediate pain, it is only one step toward curbing the federal deficit -- an issue that will return with a February fight over raising the $16.4 trillion debt limit.

’Fair Share’

"The deficit needs to be reduced in a way that’s balanced," Obama said at the White House. He said he wants top earners and corporations to pay even more and that Congress must raise the debt ceiling. "Everyone pays their fair share. Everyone does their part," he said.

All 19 industry groups in the Stoxx 600 advanced during the year’s first trading session. The European benchmark jumped 14 percent last year, the biggest increase since 2009. Rio Tinto Group led a rally in mining companies today, rising 5.8 percent. Porsche SE and Volkswagen AG climbed more than 4.3 percent to pace gains in automakers.

Euro-area manufacturing output contracted more than initially estimated in December, adding to signs a recession in the currency bloc may extend as leaders struggle to tackle the sovereign-debt crisis. A gauge of manufacturing in the 17-nation euro area fell to 46.1 from 46.2 in November, London-based Markit Economics said. That’s below an initial estimate of 46.3 on Dec. 14. A reading below 50 indicates contraction.

Default Swaps

The cost of insuring against default on European bank debt dropped, with the Markit iTraxx Financial index of credit- default swaps linked to 25 banks and insurers falling 16 basis points to 126, the lowest since May 4.

The MSCI Asia Pacific excluding Japan Index gained 2.1 percent, the highest since August 2011. Equity markets in Japan and mainland China are closed today and tomorrow for public holidays.

Developing-nation stocks rose the most since September, with the MSCI Emerging Markets Index adding 2 percent and the MSCI BRIC Index of the largest emerging markets 2.6 percent higher, more than 20 percent from last year’s low and poised to close in a bull market.

Copper advanced as much as 3.2 percent to $8,850 a metric ton, the highest since October. Oil in New York climbed 1.8 percent to $93.47 a barrel.

A Chinese manufacturing gauge showed a third month of expansion yesterday. The Purchasing Managers’ Index was 50.6 in December, the National Bureau of Statistics and China Federation of Logistics and Purchasing said. That compares with the 51.0 median estimate in a Bloomberg News survey of analysts and 50.6 in November. A reading above 50 indicates expansion.

Balanced Growth

China will "step up efforts to promote strong, sustainable and balanced growth in the world economy," President Hu Jintao said in a New Year’s Eve address broadcast on state media. China achieved stable economic development in 2012 and will seek to do the same this year while making restructuring of its growth model a focus, he said.

The dollar weakened against 14 of its 16 major peers. It slid to 16-month lows of $1.6302 per British pound and 1,063.57 Korean won, and reached the weakest level since October 2011 versus both the Swedish krona and Norwegian krone. The U.S. currency tumbled to $1.3263 per euro.

Weaker Yen

The yen also slid as investors sought higher-yielding assets and Japanese Prime Minister Shinzo Abe reiterated his intention to weaken the nation’s currency. Japan’s currency dropped to as low as 87.33 per dollar, a level unseen since July 29, 2010, before trading at 87.13.

Treasury 10-year note yields climbed eight basis points to 1.84 percent, the highest since October. The yield on similar- maturity German debt jumped more than 11 basis points to 1.43 percent, the biggest increase since Sept. 14, while Britain’s 10-year rate climbed 14 basis points to 1.96 percent, also the largest advance since Sept. 14.

The world’s leading economies will have $220 billion less sovereign debt to refinance in 2013, cutting supply after every major government bond market rallied for the first time since the 2008 financial crisis.

The amount of bills, notes and bonds coming due for the Group of Seven nations plus Brazil, Russia, India and China will drop to $7.38 trillion from $7.60 trillion in 2012, according to data compiled by Bloomberg. Japan, the U.K., Germany, France, Italy and Brazil will see a decline, while the U.S., Canada, Russia, India and China will face an increase.

 

--With assistance from Claudia Carpenter, Paul Dobson and Andrew Rummer in London and Chua Baizhen in Singapore. Editor: Michael P. Regan


 

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