Stocks Drop With Commodities on Growth Concern

European stocks fell, paring their longest stretch of weekly gains in six years, and commodities dropped as China pledged to keep property curbs and amid concern Europe’s debt crisis is dragging on global growth. The euro weakened and Treasuries advanced.

The Stoxx Europe 600 Index (SXXP) slipped 0.3 percent at 9:47 a.m. in London, trimming a seventh weekly advance. Futures on the Standard & Poor’s 500 Index lost 0.2 percent. The S&P GSCI gauge of commodities slid 0.4 percent and oil in New York declined 0.4 percent. The euro slipped 0.2 percent versus the dollar and yen and German two-year note yields were less than zero for the 11th consecutive day before European finance ministers hold a conference call to set terms for Spain’s bailout. Thirty-year Treasury yields fell two basis points to 2.59 percent

“It’s natural to see the market take a breather after such a positive week for stocks,” said Giovanni Leonardo, a fund manager at Swiss & Global Asset Management Ltd. in Zurich, where he helps manage the equivalent of about $7.1 billion. “A better-than-expected start into the reporting seasons helped improve investor sentiment. Nevertheless, the situation remains fragile as the political decisions due to be taken in the coming months could heavily impact investor behavior.”

China won’t relax property control policies and will instead seek to keep a “firm grip” on the real estate market to prevent a rebound in housing prices, Xinhua News Agency said. General Electric Co., the world’s biggest maker of jet engines, power generation equipment and health-care imaging devices, will release its results today. Earnings at U.S. companies exceeded analyst estimates at 71 percent of the 110 S&P 500 companies that have reported quarterly results so far, according to data compiled by Bloomberg.
Vodafone Drops

The Stoxx 600’s decline pared this week’s advance to 2 percent. Its seventh weekly advance is the longest run since January 2006. Vodafone Group Plc (VOD), Europe’s largest mobile-phone company, slid 2.1 percent after posting quarterly service revenue that trailed analysts’ estimates.

The S&P 500 has risen for the past three days, bringing this week’s increase to 1.5 percent. Microsoft Corp. (MSFT) climbed 1.9 percent in German trading after reporting a bigger gain in multiyear software deals than analysts predicted last quarter. Google Inc. rallied 2.6 percent after the owner of the world’s most popular search engine said revenue surged 35 percent.

Commodities retreated for the first time in eight days. Oil was down to $91.91 a barrel and zinc fell 1.1 percent. Corn was the biggest gainer, rising 1.3 percent to $7.8825 a bushel.

The euro slid to $1.2257 per dollar and 96.35 yen, heading for a fourth weekly drop against its Japanese counterpart.

The yield on 10-year Treasuries dropped two basis points to 2.59 percent. Reports yesterday showed U.S. initial jobless claims were higher than estimated and measures of manufacturing activity and sales of existing homes missed estimates.

S&P 500 Reaches Two-Month High on Earnings as Oil Gains

U.S. stocks rose, sending the Standard & Poor’s 500 Index to a two-month high, amid better- than-estimated earnings and speculation that disappointing economic data will lead the Federal Reserve to add stimulus. Oil surged, while crops rallied as a drought intensified.

The S&P 500 increased 0.3 percent to 1,376.51 at 4 p.m. in New York, its highest close since May 3. Ten-year Treasury yields rose one basis point to 1.50 percent. The Dollar Index, a gauge of the currency against six major peers, lost 0.2 percent after gaining as much as 0.1 percent. Oil rallied 3.1 percent to a two-month high of $92.66 a barrel. Soybeans reached a record and wheat climbed to the highest since 2008 as the worst U.S. drought since 1956 scorched fields.

Equities started the session higher following better-than- forecast earnings at companies from International Business Machines Corp. (IBM) to EBay Inc. Stocks briefly turned lower as reports showed existing home sales unexpectedly declined, the Conference Board’s gauge of leading economic indicators fell more than forecast and the Federal Reserve Bank of Philadelphia said its manufacturing gauge shrank for a third straight month. The rally resumed amid speculation the reports will boost chances of more quantitative easing from the Fed.

“The tug-of-war continues,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “Earnings reports have been positive, but weakening economic data has tempered investor enthusiasm,” he said. “Always waiting in the background is the increasing possibility of another round of QE.”

Stocks have rallied for three straight days after Fed Chairman Ben S. Bernanke outlined to the Senate Banking Committee various options to ease policy further, including more purchases of Treasuries and mortgage-backed securities and altering the Fed’s language on the outlook for interest rates.
Earnings Season

Earnings have exceeded analyst forecasts at about 71 percent of the 102 companies in the S&P 500 that reported results this month, according to data compiled by Bloomberg. Profits are down 0.7 percent for the group and projected by analysts to have decreased 2.1 percent for the entire index in the second quarter, which would mark the first year-over-year decrease since 2009.

Indexes of technology and consumer-discretionary companies rose more than 1 percent to lead gains among the 10 main industries in the S&P 500 (SPX) today.
IBM Jumps

IBM jumped 3.8 percent and added 54 points to the Dow Jones Industrial Average. (INDU) At $195.34 a share, IBM is the highest- priced stock in the Dow and accounts for 11.4 percent of the price-weighted average. The company’s decade-long shift to higher-margin software sales helped IBM overcome a slowdown in technology spending last quarter and boost its full-year earnings forecast.

EBay surged 8.6 percent to $43.95, the highest price since 2006, after sales and profit topped estimates as more U.S. consumers shopped for new items on the site.

The S&P 500 has rallied almost 8 percent from a five-month low on June 1, bringing it about 3 percent away from a four-year high reached in April. The rebound came after the index tumbled 9.9 percent from April 2 through June 1, approaching a so-called correction of 10 percent.

The Stoxx Europe 600 Index (SXXP) advanced 1.1 percent to the highest level since April 3 as Electrolux AB and Akzo Nobel NV (AKZA) climbed more than 6 percent after earnings topped estimates.
European Stocks

Sandvik AB (SAND), the world’s biggest maker of metal-cutting tools, rallied 6.1 percent in Stockholm after reporting second- quarter profit that beat estimates on manufacturing demand in North and South America. Remy Cointreau SA surged 6.2 percent to a record as France’s second-largest distiller had first-quarter revenue growth that exceeded projections.

Oil advanced to a two-month high on rising concern that the Middle East will lose stability and speculation governments will act to spur economic growth. Israeli Prime Minister Benjamin Netanyahu threatened a forceful response against Iran, which he blamed for a suicide attack in Bulgaria that killed Israeli tourists, and as Syrian government forces battled rebels in Damascus. China has “relatively large” room to boost fiscal spending to support economic growth, a government researcher said.

Soybean futures for November delivery on the Chicago Board of Trade rallied 2.4 percent to $16.5825 a bushel and reached as high as $16.7375. Wheat jumped as much as 3.9 percent to $9.38 a bushel, the most since August 2008, while corn retreated from near a record.
Drought Worsens

More than half of the contiguous U.S. states were in moderate to extreme drought at the end of June, the highest percentage since December 1956, according to the National Climatic Data Center.

United Nations Certified Emission Reduction offsets for December dropped as much as 5.1 percent to a record 2.82 euros a metric ton on the ICE Futures Europe exchange in London as European Union officials struggle to cope with an oversupply of carbon permits.

Spain’s 10-year bond yield rose five basis points to 7.01 percent, increasing for a sixth straight day. The nation sold bonds due in 2014 at an average yield of 5.204 percent, compared with 4.335 percent when they were last sold on June 7. It sold five-year notes at 6.459 percent, compared with 6.072 percent on June 21 and seven-year securities at an average yield of 6.701 percent.
Spanish Debt

Demand for the two-year debt was 1.9 times the amount sold, compared with 4.26 last month and the bid-to-cover for the 2017 securities was 2.06, compared with 3.44 in June, the Bank of Spain said.

Rates on Austrian, Belgian and French debt touched record lows amid demand for sovereign debt considered to be safe.

The MSCI Emerging Markets Index (MXEF) of equities in developing nations climbed 1.2 percent to post its biggest gain in a week and reach its highest level since July 6. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong jumped 2.4 percent, the most this month. China’s Premier Wen Jiabao will probably decide to reduce banks’ reserve requirements and encourage corporate lending as the cabinet meets to discuss efforts to revive economic growth, the swap market indicates. Benchmark indexes in South Korea and Taiwan gained more than 1.4 percent. Russia’s Micex Index jumped 0.6 percent as oil gained. The ruble strengthened 1.1 percent against the dollar.

Eurogroup to approve Spanish banking sector bailout Friday

Euro zone finance ministers are expected to approve an agreement on Friday to lend up to 100 billion euros to Spain so it can recapitalize its banks, but the exact size of the loan will probably only be determined in September.

Ministers are expected in a conference call to sign off on a lengthy memorandum of understanding (MoU) with Spain spelling out the terms of the aid, which will be fully disbursed by the end of 2013.

But before Spain can decide exactly how much money it needs, it must first see the results of in-depth audits of its banking sector, which is riddled with bad property loans.

"The plan is to formally endorse the draft as it stands," one euro zone official said of the conference call, which is due to begin at 1000 GMT.

"All the rest will come later in the year, with the results of the bank-by-bank stress tests in September clarifying recapitalization needs and paving way for restructuring plans to be drawn up in October, as set out in the timeline annexed to the MoU."

Under the memorandum, 14 banking groups that make up about 90 percent of Spain's banking system will be tested for their recapitalization needs in a review due to be completed by the second half of September.

Madrid expects 30 billion euros in a first tranche of money that will be available immediately for state-rescued banks that urgently need funds.

An independent audit from consultancy firms Oliver Wyman and Roland Berger, published on June 21, showed the banking sector needed up to 62 billion euros in total.

But a second, more detailed audit, as well as new stress tests, will help determine precisely how much each bank needs and in which form - loans or cash.

Spain's three biggest banks - Banco Santander (SAN.MC), BBVA (BBVA.MC) and Caixabank (CABK.MC) - would not need extra capital even in a stressed scenario, the independent audit said.

It also said immediate problems were limited to four banks: Bankia (BKIA.MC), and CatalunyaCaixa, NovaGalicia and Banco de Valencia, the last three of which have been nationalized.

That leaves seven banking groups in the spotlight: Sabadell (SABE.MC), Popular (POP.MC), Ibercaja-Caja3-Liberbank, Unicaja-CEISS, Kutxabank, Banco Mare Nostrum and Bankinter (BKT.MC).

FOCUS ON SAVINGS BANKS

The money for the capital will be provided by the euro zone's temporary rescue fund, the European Financial Stability Facility (EFSF), a 440 billion euro fund set up in 2010 that has about 250 billion euros left, not counting the money for Spain.

The EFSF has already been used to bail out Greece, Ireland and Portugal, making Spain the fourth euro zone nation to receive emergency aid in the 2-1/2-year-old crisis.

The EFSF loans to Madrid will have an average maturity of 12.5 years and a maximum of 15 years, with interest rates of between 3 percent and 4 percent.

Once the permanent European Stability Mechanism (ESM) is operational, probably in September, it will take over the job of funding Spain's programme.

All Spain's banks will have to increase their core capital ratios to 9 percent by the end of 2012 and keep them at this level until the end of 2014. However, the government will review by December the requirements for setting aside capital to cover losses on real estate assets.

There will be a special focus on savings banks, or "cajas", which had close links with local governments and were responsible for much of the unsustainable lending over the last decade, and their governance structure will be reviewed.

According to the MoU, Spanish authorities will prepare by the end of November a new law to reduce the stakes that savings banks have in commercial lenders to non-controlling levels. Banks that are controlled by the cajas and receive state aid would become listed companies.

The measure is mostly symbolic, applying only to a handful of banks representing a small share of Spain's banking system, but a failure to implement it could worry investors.

The document also says that holders of hybrid capital and subordinated debt in state-rescued banks will have to take a haircut on their investments in order to minimize the cost to taxpayers of the restructuring.

Hundreds of thousands of small shareholders who bought instruments such as preference shares are likely to be affected.

The first injection of capital into banks not already rescued by the state and unable to raise capital by themselves can be expected by October, after reviews by the Spanish government and the European Commission.

Don't give up on euro bonds forever: French finance minister

The prospect of euro zone nations issuing common bonds may not have immediate political traction, but the monetary union should not relinquish the idea entirely, French Finance Minister Pierre Moscovici said on Thursday.

Moscovici spoke to reporters at the French ambassador's residence in Washington following meetings with U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, whom he described as somewhat "less nervous" about the European situation.

Asked about the possibility of joint debt issuance, which many see as a likely element in an eventual resolution of Europe's prolonged financial crisis, the minister noted some countries in Europe are not very keen on the idea. Germany has consistently voiced opposition to collective borrowing by the euro zone as a whole.

"I don't think we should give up on it forever," Moscovici said.

He said he offered U.S. leaders an upbeat message about President Francois Hollande's intention to beef up the country's weak economic growth even as his administration tries to bring down the country's budget deficit.

The finance minister said very low, sometimes negative, yields on French government securities were a sign of market confidence in Europe's second-largest economy.

Moscovici said he hopes French economic growth can come closer to attaining its full potential next year, which he pegged at around 2 percent.

The International Monetary Fund sees France's gross domestic product expanding just 0.3 percent this year and 0.8 percent next year.

Euro zone woes spur UK property bargain hunt

UK property businesses are hunting for bargains in the country's battered real estate market, encouraged by heavy discounts that show how the euro zone crisis has hit confidence in the sector, Lloyds Banking Group (LLOY.L) said on Friday.

Data from the bank's quarterly Commercial Property Confidence Monitor showed the net balance of major businesses intending to make purchases in the next six months rose to 57 in May, from 52 in February, while the net balance of fund managers keen to invest rose to 38 from 36 over the same period.

A net balance is the sum of all positive and negative survey responses which ignores the middle ground. A positive number, for instance, would indicate that there were more bullish responses than bearish ones.

One survey respondent, a small company, told Lloyds that "property is so cheap people are starting to buy," the bank said in the report.

Lloyds Managing Director of Corporate Real Estate Lynda Shillaw said there was clearly pessimism about the market's near-term prospects.

"Investors are nevertheless seeing the opportunity for longer term value growth when buying at today's prices," she said in a statement.

UK property values fell 2 percent in the first half of 2012 and recovery is expected to be still far off due to the uncertain economic outlook, Investment Property Databank said last week.

Despite the broader growth in investment appetite, Lloyds said most businesses expected activity in the UK property market to slow over the next six months, with the number of pessimists outweighing the number of optimists among small and medium-to-large businesses.

A Reuters poll of economists predicted on Thursday that the euro zone has sunk back into its second recession since 2009 while a second poll said that the British economy would stay in recession three months longer than previously expected.

DIFFICULT COCKTAIL

Fund managers in the survey held the most negative outlook for the sector with half expecting a slowdown versus only 4 percent who see an improvement.

"Fund managers remain pessimistic regarding shorter-term prospects in a property market faced with a cocktail of difficulties," said Andrew Smith, Chairman of the Investment Property Forum's Research Steering Group which co-produced the report.

"However, some see scope to take advantage of an arbitrage opportunity afforded by depressed asset pricing in the current market," said Smith, who is also global head of property at Aberdeen Asset Management.

Lloyds classifies major businesses as those with loans of more than 50 million pounds ($78 million), mid- to large-sized businesses as those that borrow 1-50 million pounds and small business as those with loans of less than 1 million pounds. It conducted its survey of 416 property decision-makers in May.

($1 = 0.6401 British pounds)