Stocks Pare Loss, Treasuries Advance on Fed’s Economic Stimulus

By Nikolaj Gammeltoft and Rita Nazareth

Aug. 10 (Bloomberg) -- U.S. stocks pared losses, 10-year Treasury yields fell to a 18-month low and the dollar trimmed gains after the Federal Reserve’s plan to stimulate the economy through the purchase of government debt overshadowed data indicating China’s growth is slowing.

The Standard & Poor’s 500 Index lost 0.7 percent to 1,120.49 at 3:20 p.m. New York time after slumping as much as 1.4 percent. Yields on 10-year Treasuries slipped up to 9 basis points to 2.74 percent. The U.S. Dollar Index rose 0.2 percent, following a gain of as much as 1 percent.

Fed officials will reinvest principal payments on their mortgage holdings into long-term Treasury securities to reduce borrowing costs throughout the economy, the central bank’s first attempt to bolster growth in more than a year. “The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement. Data earlier showed China’s import growth and the pace of property-price gains slowed in July.

“The first major action from Fed in nearly a year is clearly what the market wanted and the Fed delivered,” said Burt White, who helps oversee $284 billion as chief investment officer at LPL Financial Corp. in Boston. “They’re signaling to the market that their foot is firmly on the accelerator and that they’re ready to put a backstop to prevent a double-dip. It’s a symbolic reassurance to the market.”

Bank of America, Intel

Bank of America Corp. fell 1.2 percent after earlier slipping as much as 2.2 percent. Colgate-Palmolive Co. rallied 2.9 percent as investors bought companies whose earnings are least tied to economic growth. Intel Corp. led declines in semiconductor companies after Barclays Plc and R.W. Baird & Co. lowered their ratings on the stock amid weakening orders for personal computers. Intel fell 4.3 percent to $19.76.

Equities advanced yesterday amid speculation slower job creation would prompt the Fed to take measures to strengthen the recovery. While Chairman Ben S. Bernanke said last month the central bank wasn’t ready to take action in the “near term,” data on Aug. 6 showed growth in private payrolls in the U.S. missed projections.

The MSCI World Index slumped 0.5 percent. It lost 1.7 percent earlier following the economic data from China. The Shanghai Composite Index tumbled 2.9 percent for the biggest drop among 72 national measures tracked by Bloomberg. Oil slid 1.5 percent and copper futures slipped 0.8 percent. The euro slumped 0.1 percent to $1.3209 after retreating as much as 1.1 percent before the Fed’s announcement.

Trimmed Forecasts

“The additional liquidity is encouraging,” said Wasif Latif, vice president of equity investments at USAA Investment Management Co., which oversees $45 billion in San Antonio. “Given the weakness that we’ve seen, additional steps would need to be taken in order to stimulate the economy.”

Concern the U.S. faces a slowing expansion or the second recession in three years has pushed the benchmark gauge for U.S. equities down 7.4 percent since April 23. The decline reached 16 percent on July 2 after the Labor Department said private employers added 83,000 jobs in June, fewer than estimated.

Economists have trimmed forecasts for U.S. economic expansion since May. Gross domestic product may increase 3.1 percent this year, 2.9 percent next year and 3 percent in 2012, according to the median estimate of 55 contributors to a Bloomberg survey. Three months ago, the estimates were 3.2 percent for 2010, 3.1 percent for 2011 and 3.1 percent for 2012, according to data compiled by Bloomberg.

Bernanke said July 21 that the central bank wasn’t ready to take any action in the “near term.” At the same time, his assessment that the economic outlook remains “unusually uncertain,” along with recent weakness in housing and manufacturing, have fueled speculation stimulus was at hand.

Home Resales Drop

The Commerce Department said last week that consumer spending and personal incomes in the U.S. were unexpectedly unchanged in June while factory orders decreased. The same day, the National Association of Realtors’ index of pending home resales dropped 2.6 percent from the prior month. Economists projected a 4 percent gain.

The Federal Reserve has held its target rate for overnight loans between banks at a record low since December 2008, after the collapse of New York-based Lehman Brothers Holdings Inc. three months earlier helped send the S&P 500 to its biggest loss in seven decades.

Stocks rose last week, with the S&P 500 increasing 1.8 percent and reaching the highest level since May. Second-quarter earnings at S&P 500 companies have beaten analysts’ estimates by 11 percent, helping spur a 6.9 percent rally in July. The index slipped 0.4 percent to 1,121.64 on Aug. 6 after hiring by private employers in the U.S. trailed forecasts, according to the Labor Department.

China’s Economy

The Shanghai Composite Index slid after China said import growth and the pace of property-price gains slowed in July, deepening concern that demand is waning in the world’s fastest- growing major economy. The MSCI Emerging Markets Index dropped 1.2 percent, the biggest intraday retreat since July 1.

Russia’s Micex Index sank 1.5 percent. Record heat and drought in the world’s largest energy exporter are curbing stock trading as bankers flee Moscow to escape smoke from wildfires. South Korea’s won declined for the first time in eight days after the North fired artillery near a disputed sea border.

The Stoxx Europe 600 Index slid 0.9 percent, led by basic- resource producers and travel companies. BHP Billiton Ltd., the world’s largest mining company, fell 2 percent. TUI Travel Plc, Europe’s biggest travel operator, slumped 10 percent after saying earnings will be at the lower end of forecasts.

Worst Since May

Oil fell 1.3 percent to $80.20 in New York after earlier dipping below $80 for the first time in a week. Copper futures slumped up to 2.5 percent to $3.2715 a pound on the Comex in New York. The Thomson Reuters/Jefferies CRB Index of commodities slipped 0.8 percent, posting a fourth straight drop, the longest losing streak since May.

The dollar strengthened 0.3 percent against the euro to $1.3187. Australia’s dollar fell for a second day against its U.S. counterpart, dropping 0.4 percent to 91.33 U.S. cents, after a report showed business confidence in the nation slipped in July to the lowest level in more than a year.

Wheat fell, heading for the steepest three-day decline since October, on speculation that importers will cut purchases after prices rallied last week to a 23-month high. Wheat futures for December delivery fell 17 cents, or 2.3 percent, to $7.2675 a bushel on the Chicago Board of Trade, after dropping as much as 2.9 percent. Pork-belly futures for August delivery rose 3.5 percent to a record $1.32 a pound on the CBOT, jumping by the exchange limit of 4.5 cents.