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Wednesday February 14, 2007 - 23:16:06 GMT
Reuters - www.reuters.com

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GLOBAL MARKETS-Stocks, bonds rally on Fed chief's inflation view

NEW YORK, Feb 14 (Reuters) - U.S. stocks and bonds surged on Wednesday, with the Dow climbing to an intraday record, after Federal Reserve Chairman Ben Bernanke said the economy is growing and inflation pressures were starting to ease.

That increased the perceived chance of a cut in U.S. interest rates by the end of the year, which would make borrowing cheaper for U.S. companies and boost the prices of Treasury bonds.

But the prospect of monetary easing would erode the U.S. dollar's interest-rate advantage over other currencies and the greenback fell after Bernanke's remarks.

In New York, U.S. crude oil futures fell below $58 a barrel, while gold hit a six-month high at $676.60 an ounce.

In his testimony before the Senate Banking Committee, Bernanke expressed confidence that the U.S. economy will grow despite a slowdown in housing and said, "There are some indications that inflation pressures are beginning to diminish."

"This is a little love note to the market," said Ethan Harris, chief U.S. economist at Lehman Brothers in New York. "This is a very market-friendly speech."

The benchmark 10-year Treasury note's price surged 19/32 to 99-4/32, pushing the yield down to 4.74 percent, the lowest intraday level in four sessions. Bond yields and prices move inversely.

"It seems that his talk is bullish for the stock and bond markets. He sees that inflation is moderating, suggesting that core inflation is in check," said Robert Van Batenburg, head of global research at Louis Capital Markets in New York.

U.S. short-term interest-rate futures still favored the Fed holding its benchmark fed funds rate at 5.25 percent through at least June. The chance of a rate cut at the next Federal Open Market Committee meeting in March remained at just 2 percent.

WHIFF OF A RATE CUT

However, after Bernanke's comments, a jump in deferred Eurodollar futures was enough to fully price in a 25-basis-point rate cut by year end, compared with only a 74 percent chance of that shown on Tuesday.

The blue-chip Dow average jumped to an intraday record at 12,759.40. The S&P 500 climbed to an intraday high at 1,457.65, its highest since late September 2000.

The Dow Jones industrial average <.DJI> rose 87.01 points, or 0.69 percent, to end at 12,741.86. The Standard & Poor's 500 Index <.SPX> gained 11.04 points, or 0.76 percent, to finish at 1,455.30. The Nasdaq Composite Index <.IXIC> advanced 28.50 points, or 1.16 percent, to close at 2,488.38, off its session high at 2,494.51.

European shares rose amid a flurry of corporate results, helped also by rallies in the United States and Asia.

The pan-European FTSEurofirst 300 index <.FTEU3> rose 0.76 percent to end at 1,547.93, its highest close since late 2000.

In Japan, the Nikkei <.N225> finished at 17,752.64, its highest close since May 9, 2000. For the day, the Nikkei was up 131.19 points, or 0.74 percent.

DOLLAR SLUMPS VS EURO

The dollar hit a six-week low against the euro on the view that Bernanke's inflation remarks increased the chances of an interest-rate cut this year.

Bernanke's remarks surprised those who expected him at the very least to echo recent comments from other Fed officials who have dwelt on upside risks to the inflation outlook.

"We were expecting Bernanke to be more hawkish. Obviously, the headlines were not as hawkish. So you're going to a see a little bit of a sell-off in the U.S. dollar," said Firas Askari, head of FX trading at BMO Capital Markets in Toronto.

The euro broke solidly above $1.31 for the first time since early January after Bernanke said inflation pressures are starting to diminish.

In late New York trading on Wednesday, the euro traded at $1.3126, up 0.69 percent from $1.3036 late Tuesday.

The dollar fell to 120.75 yen , down 0.29 percent from 121.10 late on Tuesday. The dollar also weakened against other major currencies.

GOLD LEAPS, OIL SLIDES

Gold jumped over 1 percent, reaching a new six-month high as the dollar fell further. The precious metal often has a strong inverse correlation with the U.S currency.

COMEX gold for April delivery gained $3.50 to settle at $672.00 an ounce.

Crude oil futures traded in New York fell below $58 a barrel after U.S. government inventory data showed a smaller-than-expected decline last week in stockpiles of heating oil and other distillates. That disappointed the energy market's bulls after last week's extremely cold weather, traders said.

U.S. crude for March delivery fell $1.06, or 1.8 percent to settle at $58 a barrel, off a session low at $57.50, on the New York Mercantile Exchange. (Additional reporting by Richard Leong, Caroline Valetkevitch, Ellis Mnyandu, Lucia Mutikani, Jennifer Coogan, Steven C. Johnson and Gene Ramos in New York, Ros Krasny in Chicago; Veronica Brown in London, Peter Starck in Frankfurt and Aya Takada in Tokyo)

© Reuters 2007. All rights reserved.

 

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