Wall Street Rallies 1.8% on Euro Pact Optimism; France Under Scrutiny

Bikram Pandey
18 Oct, 2011
New York City

Stocks in late rally in New York soared on speculation that European rescue fund will be increased to

[R]4:30 PM New York – Stocks in late rally in New York soared on speculation that European rescue fund will be increased to €2 trillion. French bonds were under attack after Moody’s put France’s AAA rating on a watch. U.S. wholesale prices surge 6.9% in September. Banks and financials closed higher.[/R]

U.S. indexes turned positive and erased losses of 0.8% on the rising optimism about bank earnings and housing market. The late rally in market indexes was driven by unconfirmed reports that France and Germany agreed to lift rescue fund size to €2 trillion.

Bank of America reported better than expected earnings and Goldman Sachs lost money in the quarter as estimated. IBM’s quarterly revenues were lower than expected.

However, European markets were mixed and struggled to find a direction after France faced a possible debt downgrade and bond yields widened to record highs in the region.

Separately, in a wholesale inflation index increased 6.9% in September month from a year ago after rising at 6.5% rate in August. The core prices excluding food and energy increased at 2.5% rate, same as in August.

Federal Reserve has been focused on the core inflation on a monthly basis and highlighting that the inflation is under control but prices felt by most families and individuals are rising at a faster pace than the Fed’s statistics show.

The producer prices index, also known as wholesale price index increased 0.8% in September from August and monthly core prices increased 0.2% after rising at 0.1% in August.

Moody’s Investors Services on late Monday offered negative comments on the French economic growth and possible increase in debt if the nation faces higher cost of supporting banks.

A few hours ago, the ratings agency said it may put France’s AAA rating on watch with a negative outlook and may downgrade in the next three months if slowing economic growth and higher cost of bank bailout increase the government debt.

French Finance Minister Francois Baroin said in radio interview that “we have room to maneuver” and “we can take all measures so there is less concern.” He also added that this year’s economic growth estimate of 1.75% is optimistic and will be revised lower.

The yields on French bonds widened to 3.13% and the spreads to German 10-year bunds increased to 114 basis points, the widest since the creation of the euro nineteen years ago. The yield spread to Dutch bonds also increased to 70 basis points, widest in 16 years.

The yield on the Italian bonds spreads to Germany increased 15 basis points to 385 basis points.

Separately, German private survey also indicated growing pessimism among investors in Germany and the widely followed index tracked by ZEW institute declined the low last seen a year ago. The survey also forecasted a mild recession in the last quarter of 2011 and the first quarter of 2012.

In the U.S. earnings, Bank of America’s third quarter net income swung to $6 billion from a loss in the quarter a year ago and IBM’s third quarter net income rose 7% to $3.8 billion but revenues missed the target. Goldman Sachs reported third quarter net loss of $428 million but stock rose on optimism that the current quarter will be stronger. Coca-Cola third quarter net earnings rose 8% to $2.2 billion.

European markets extended losses for the second day in a row as investors turned cautious after Germany cooled the expectations ahead of the economic summit this weekend. Milan judge rejected a tax fraud court case against Berlusconi.

Stocks in Japan declined after rising to a 6-week high on the cautious outlook for the euro zone ahead of the weekend summit. Chinese slower economic expansion also contributed to market jitters and Thai floods wreak more havoc in the central Thailand as water rushes down to Bangkok.

Australian stocks were caught in cross currents weak Chinese economic growth data and ongoing worries in the euro zone. The benchmark indexes declined more than 2% and Qantas cancelled 80 additional flights. Telstra shareholders approved handover of fixed line monopoly to NBN.

Commodities, Bonds and Currencies

The yield on 10-year U.S. bond closed up to 2.19% and 30-year bond increased to 3.18%.

The U.S. dollar increased to $1.379 to one euro and closed lower against the Japanese yen to 76.77 yen.

Immediate delivery futures of Texas crude oil increased $2.07 to $88.45 a barrel and futures of natural gas decreased 0.13 cents to $3.55 per mbtu and gasoline price increased 1.6 cents to 275.89 cents a gallon.

In metals trading, copper increased 1.95 cents to $3.39 per pound, gold decreased $12.80 to $1,663.80 per ounce and silver increased $0.44 to $32.26.