Euro Weakens as Gold, Treasuries Retreat as S&P500 Fluctuates

New York (Oct 31)   The euro weakened the most in five months versus the dollar as inflation in the region slowed more than forecast and improving U.S. economic data fueled speculation the Federal Reserve will taper stimulus in coming months. Treasuries and gold fell, while U.S. stocks fluctuated.

Europe’s shared currency slid 1.1 percent to $1.3588 at 3:04 p.m. in New York. The Bloomberg U.S. Dollar Index, a gauge of the currency against 10 major peers, increased 0.4 percent. Rates on 10-year Treasury notes rose for a second day, adding one basis point to 2.55 percent. Gold futures slid 1.9 percent and silver sank 4.7 percent. The Standard & Poor’s 500 Index, which fell from a record yesterday, was little changed after rising as much as 0.3 percent and losing 0.4 percent earlier.

Inflation in the euro region slowed to a four-year low of 0.7 percent and unemployment held at a record 12.2 percent, fueling speculation the central bank will cut rates. The Fed maintained its $85 billion in monthly bond purchases yesterday, while saying the economy shows signs of “underlying strength.” U.S. data today showing the biggest jump in a gauge of business activity in more than three decades and a drop in jobless claims added to speculation the central bank will consider tapering stimulus at upcoming meetings.

“The market is re-rating expectations to maybe earlier Fed tapering than consensus,” Andres Garcia-Amaya, New York-based global market strategist at JPMorgan Chase & Co.’s mutual funds unit, said in a phone interview today. His firm oversees $400 billion. “It gave the market a chance to remember that nothing is set in stone and the Fed could actually taper in December or January.”

Euro Weakens

The euro declined against 14 of its 16 major counterparts, sliding 1.3 percent versus the yen, while the dollar strengthened against 11 of 16.

The median forecast in a survey of 42 economists was for the euro-area inflation rate to stay at 1.1 percent. The data mark the ninth straight month that the rate has been less than the ECB’s 2 percent ceiling, and prompted BNP Paribas SA and JPMorgan Chase & Co. to forecast an interest-rate cut by the ECB in December. The central bank, which will publish new economic projections that month, has said there is a “subdued outlook” for inflation in the 17-nation euro area.

“There was a big downward surprise for inflation numbers in the euro zone,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a phone interview. “It was a very dovish signal for the European Central Bank. Markets built up long positions in the euro too quickly.” A long position is a bet an asset will rise in value.

Currency Swings

The yen posted its first gain in five days versus the dollar while Sweden’s krona sank for a fourth day against the U.S. currency before a report tomorrow forecast to show manufacturing slowed.

A measure of price swings among the currencies of Group of Seven nations increased to the highest in two weeks. The JPMorgan G7 Volatility Index rose 3.7 percent, the most since August, to 7.95. The 2013 average is 9.38 percent.

Fed policy makers yesterday signaled diminishing concern over higher borrowing costs. The central bank refrained from providing stronger signals of prolonged stimulus and limited its comment on the costs of budgetary wrangling in Washington to the observation that “fiscal policy is restraining” growth.

Economic Data

The MNI Chicago Report business barometer jumped to 65.9 from 55.7 in September, the biggest monthly increase in more than three decades and the index’s highest reading since March 2011. Readings above 50 signal expansion in business activity. The index exceeded the most optimistic estimate in Bloomberg survey, in which the median projection was 55. A gauge of orders advanced to the highest level in nine years.

First-time applications for U.S. jobless benefits decreased to 340,000 in the week ended Oct. 26, Labor Department figures showed. That compared with a median estimate of 338,000 in a Bloomberg News survey

Economists at Citigroup Inc. and Barclays Plc said yesterday’s Fed policy statement opens the possibility of reduced bond purchases as soon as December. The odds of a taper in January rose to 45 percent, from 25 percent before the decision, according to Citigroup. Economists surveyed by Bloomberg Oct. 17-18 had predicted the Fed would begin paring stimulus in March.

Tapering ‘Inevitable’

“Tapering is inevitable, and that’s what you read from last night’s statement,” said Donald Williams, the Sydney-based chief investment officer at Platypus Asset Management Ltd., which manages about A$1.6 billion ($1.5 billion). “When they do start tapering, that will be in a context that the economy is looking good and likely to strengthen further, which should be good for earnings and equities. You can see equity markets correcting, but it’s more negative for gold and commodities.”

Among stocks moving today, Avon Products Inc. plunged 23 percent, the most on a closing basis since 1999, after the cosmetics company posted a quarterly loss amid bribery probes. JDS Uniphase Corp. tumbled 9.6 percent as the electronic testing and measurement company’s sales forecast trailed analysts’ estimates. Visa Inc. lost 2.8 percent after the bank-card network said revenue rose less than projected. Expedia Inc. rallied 18 percent after posting earnings that exceeded estimates.

Per-share profit has beaten analysts’ estimates at 76 percent of the 356 companies in the S&P 500 that have announced their latest results, according to data compiled by Bloomberg.

Divergent Views

Two of America’s best known investors are moving in opposite directions in the stock market, with Laszlo Birinyi predicting more gains as David Einhorn takes a more cautious approach.

Holdings that profit if stocks gain at Einhorn’s Greenlight Capital Re Ltd.’s exceeded short bets by 35 percentage points as of Sept. 30, compared with about 42 percentage points three months earlier, he said today on a conference call. Birinyi, president of Birinyi Associates Inc., said the S&P 500 will reach 1,820 by February and bought calls that profit from a rally in equity benchmark.