S&P 500 Rises Most in Two Months, Dollar Rallies on Fed

New York (Dec 17)  U.S. stocks surged the most since 2013 after the Federal Reserve pledged patience on the first rate increase since 2006 even as economic growth shows signs of accelerating. Treasuries sank and the dollar rallied on expectations for higher borrowing levels in 2015.

The Standard & Poor’s 500 Index (SPX) surged 2.1 percent at 3:50 p.m. in New York, the most since October 2013. The yield on 10-year Treasury notes climbed seven basis points to 2.13 percent. The Bloomberg Dollar Spot Index added 1 percent. West Texas Intermediate crude fluctuated after earlier rising more than 4 percent. The ruble gained versus the dollar before Russian President Vladimir Putin addresses the media at his annual press conference tomorrow.

The Fed said it will be patient on the timing of a rate increase, replacing a pledge to keep borrowing costs near zero for a “considerable time,” and raised its assessment of the labor market. The change in guidance is another step in the Fed’s plan to exit from the loosest monetary policy in its 100-year history. While a faster-than-expected drop in unemployment is pushing the central bank toward raising rates next year, plunging prices of oil and commodities are holding inflation below its target.

“The game has really changed in terms of inflation,” Jeff Kravetz, the Phoenix-based regional investment director at US Bank’s Private Client Reserve, said by phone. “There’s heightened uncertainty in international markets. The drop in oil prices has kept the lid on inflation. The Fed has to wait to see how these two factors play out. That’s why they retained dovish language.”

Consumer Prices

The consumer-price index dropped 0.3 percent in November, the most since December 2008, after being little changed the prior month, a Labor Department report showed today. The retreat was led by a plunge in fuel costs.

Equities briefly pared their rally as Fed Chair Janet Yellen said a rate increase is possible at every meeting, though she doesn’t foresee the first increase in interest rates for “at least the next couple of meetings.”

Persistently low inflation allows Fed policy makers to exercise patience in raising the benchmark interest rates. Plunging fuel costs also will free up money that households can spend on other goods and services, bolstering the economic expansion.

“They’re clearly putting wording there that they have no sense of urgency in trying to normalize policy,” Peter Jankovskis, who helps oversee $1.9 billion as co-chief investment officer of Lisle, Illinois-based OakBrook Investments LLC, said by phone. “They don’t see inflation pressure on the horizon. With the statement, and if we can see some stabilization in oil prices, we’re well poised for a rally here perhaps through the year-end.”

Oil Price

Equities rallied earlier in the session as oil prices rose from near five-year lows today, sending energy shares in benchmark indexes from Europe to Canada and the U.S. surging. WTI reversed its gain in afternoon trading to fall 0.2 percent, while Brent traded higher by 1.5 percent.

All 10 major groups in the S&P 500 advanced, with energy shares jumping 3.7 percent after climbing 0.7 percent yesterday. Raw-materials shares added 2.1 percent.

Noble Energy Inc. rose 7 percent and Nabors Industries Ltd. surged 6.4 percent, while Newfield Exploration Co. climbed 6.4 and Transocean Ltd. added 5.9 percent. Exxon Mobil Corp. and Chevron Corp. added at least 2.9 percent.

Oil futures rebounded from near the lowest level since May 2009 even as Russia echoed the strategy of the Organization of Petroleum Exporting Countries and U.S. crude supply fell less than estimated.

“We are now finally reaching a point where the market isn’t going completely straight down anymore,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.4 billion. “It probably has much less to do with fundamentals and a lot more to do with traders positioning.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major currencies, rallied as the greenback gained 1.6 percent to 118.29 yen after depreciating to 115.57 yesterday, the weakest since Nov. 17.

The U.S. currency strengthened 1.1 percent to $1.2366 per euro. The yen fell 0.5 percent to 146.37 per euro after adding 1.6 percent in the previous two days.

While today’s FOMC statement didn’t mention global market turmoil sparked by oil and the Russian currency crisis, Yellen said any spillover from the financial crisis in Russia is likely to be small.

After sliding as much as 7.7 percent, the ruble strengthened 6.7 percent against the dollar. The dollar-denominated RTS Index (RTSI$) added 14 percent today after a 12 percent slump yesterday. The benchmark Micex Index slid 2.1 percent, taking its year-to-date retreat to 6 percent.

Sanctions imposed by the U.S. and Europe after Putin’s invasion of Crimea and the tumbling price of oil have pushed Russia’s economy into freefall. The ruble sank to a record low against the dollar this week, Russian banks and companies face $120 billion in foreign currency debt payments next year and consumers throughout the country are going on buying sprees to spend their money before its value plummets further.

President Barack Obama will end the U.S. isolation of Cuba that has persisted for more than a half century, initiating talks to resume diplomatic relations, opening a U.S. embassy in Havana and loosening trade and travel restrictions on the nation.

After a 1.7 percent jump yesterday, the Stoxx Europe 600 resumed a selloff today before erasing its loss. Oil-and-gas producers rose the most among 19 industry groups as Total SA and Royal Dutch Shell Plc advanced. Rio Tinto Plc led increases among miners.

Following the close of European trading, Greek Prime Minister Antonis Samaras’s bid to elect a new head of state faltered in parliament after he failed to gather enough support from lawmakers for his nominee in the first of three attempts.

The MSCI Emerging Markets Index climbed 1.1 percent, ending an eight-day drop that left it at the lowest level since August 2013, as the ruble rebounded.

China’s benchmark stock index rose 1.3 percent to a four-year high on speculation the government will loosen monetary policy and ease capital requirements that may allow brokerages to boost margin lending.

The People’s Bank of China rolled over at least a portion of a three-month lending facility from September that was set to expire, a government official familiar with the matter said after the market close.

Source: Bloomberg