U.S. Stocks Rise While Treasuries, Gold Slip Amid Citi

July 14, 2014

New York (July 14)  U.S. stocks rose with European equities on an increase in takeover activity and Citigroup Inc. earnings. Treasuries and gold retreated, while Portuguese bonds advanced.

The Standard & Poor’s 500 Index added 0.5 percent to 1,977.11 at 4 p.m. in New York, rebounding for the biggest weekly drop since April. Citigroup jumped 3 percent after reporting adjusted profit that topped estimates. Goldman Sachs Group Inc. boosted its year-end target for the U.S. equities benchmark to 2,050. The yield on 10-year Treasuries rose three basis points to 2.54 percent. Portugal’s 10-year securities had the steepest two-day gain in a month. Gold was poised for the biggest drop in almost seven months.

Citigroup rose after better-than-expected trading revenue and lower credit costs helped second-quarter profit beat analysts’ estimates and the company resolved a mortgage-related probe. Companies from Goldman Sachs Group Inc. to Intel Corp. and Johnson & Johnson report earnings this week. Shire agreed to recommend the latest bid from AbbVie Inc. to its shareholders, while Abbot Laboratories said it will sell its generic-drug business. European Central Bank President Mario Draghi testified to lawmakers in Strasbourg after announcing a package of measures last month to shore up the economy. Federal Reserve Chair Janet Yellen testifies before Congress tomorrow.

“The second-quarter earnings season in the U.S. is likely to be the next major driver of global markets,” Evan Lucas, a markets strategist in Melbourne at IG Ltd., wrote in an e-mail to clients today. “With all the major U.S. banks reporting this week, the market will get the best view of the ‘self-sustaining’ U.S. economy that the Fed now sees.”

Citi Earnings

The S&P 500 (SPX) slid 0.9 percent last week amid signs of financial stress at a Portuguese bank and speculation that the recent rally is overdone. Profit at S&P 500 companies probably rose 4.5 percent in the three months through June, while sales gained 3.1 percent, analyst estimates compiled by Bloomberg show.

Citigroup led financial shares higher. Revenue from equity and fixed-income trading, while down 15 percent from a year earlier, fell less than the third-largest U.S. bank by assets predicted two months ago. Earlier today, Citigroup and the U.S. Justice Department announced a $7 billion agreement that resolves a probe into sales of mortgage securities leading up to the financial crisis.

Goldman Forecast

Goldman Sachs raised its S&P 500 forecast for 2014 today to 2,050 from 1,900. Rising earnings and faster economic growth will push equities higher and stocks are still attractive relative to bonds, according to a research report from David Kostin, chief equity U.S. strategist at the bank.

“Earnings generally are coming in pretty positively here and revenues are as well,” said Timothy Ghriskey, chief investment officer at New York-based Solaris Asset Management LLC, in a phone interview. “It’s a very early stage in this earning’s season to declare victory, but the indications look good here. Citi’s numbers are very strong.”

Investors will also be watching statements from central banks and economic reports this week for clues to the strength of the global economy.

Yellen will deliver her semi-annual monetary policy testimony to the Senate Banking Committee tomorrow and to the House Committee on Financial Services the following day.

Minutes of the Fed’s June meeting released last week showed officials have agreed they’ll end their asset-purchase program in October if the economy holds up. At the same time, the policy makers said the central bank should continue to support favorable financial conditions needed to sustain growth, according to the minutes.

Draghi Comments

Draghi said today the ECB stands ready to take further action if needed after the central bank recently announced a targeted lending program for banks that aims to boost credit for the real economy. The so-called TLTRO program, part of a wider package of measures announced in June, offers as much as four years of low-cost funding tied to bank lending.

The Stoxx Europe 600 Index climbed 0.9 percent as all 19 industry groups rose. The gauge slid 3.2 percent last week, its biggest weekly drop since March.

Shire Plc advanced 0.7 percent after the U.K. drugmaker said it’s willing to back a 31.4 billion-pound ($53.7 billion) takeover by AbbVie Inc. Rolls-Royce Holdings Plc rose 1.3 percent after Airbus Group NV said it will use the U.K. company’s engines to upgrade its A330 plane. Airbus was little changed.

Meda AB, the Swedish producer of allergy medicine, fell 4.7 percent. Mylan Inc. is buying Abbott Laboratories’ generic-drug business and forming a new company that will be incorporated in the Netherlands. Mylan rose 2.1 percent.

Merger Monday

“It looks like this is another merger Monday, which could be adding to optimism we’re seeing today,” Jeffrey Saut, chief investment strategist at Raymond James & Associates Inc., said by phone. Raymond James oversees $450 billion in assets. “You had all these mergers and takeover announcements over the weekend. It’s not just here in the U.S., it’s been a global phenomenon throughout the first half of this year.”

Banco Espirito Santo SA tumbled 7.5 percent and its subordinated bonds fell to a record. The bank’s parent sold a 4.99 percent stake to meet loan repayments and the firm named Vitor Bento chief executive officer today. Financial troubles at the group sparked concern last week that the region was vulnerable to financial shocks, triggering a selloff that helped erase $1 trillion from the value of global equities.

Under Control

“Last week was a reminder that the European financial crisis is far from over,” said Christian Zogg, who manages the equivalent of about $11 billion as head of equity and fixed income at LLB Asset Management AG in Vaduz, Liechtenstein. “The Portuguese bank Espirito Santo was doing some harm to sentiment. The situation seems to be under control so far.”

Portugal’s 10-year yield fell six basis points to 3.81 percent. The rate is down 18 basis points in the past two trading days, the biggest drop since the period through June 9.

The MSCI Emerging Markets Index added 0.5 percent, advancing after the first weekly decline in three. The Shanghai Composite Index added 1 percent, the most in a month, and the Hang Seng China Enterprises Index of mainland shares traded in Hong Kong added 0.8 percent. Thai shares extended the longest winning streak in almost four years.

China’s economy, the world’s second-largest, probably expanded 7.4 percent in the three months to June 30 from a year earlier, according to the median of 44 economists’ estimates compiled by Bloomberg before data scheduled for July 16.

The ruble retreated 0.4 percent per dollar and the Micex Index slipped 1.1 percent. Russia and Germany called for a resumption of Ukraine crisis talks after an artillery shell landed in Russian territory, killing one person.

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