Stocks retreat amid US budget deadlock

US stocks fell, halting a six-day rally in the Standard & Poor's 500 Index, as the standoff in federal budget negotiations overshadowed a drop in jobless claims and growth in retail sales. Treasuries declined while precious metals led losses in commodities.

The S&P 500 lost 0.6 per cent to 1,420.44 at 1:26 p.m. in New York, ending its longest rally since August, and Europe's regional benchmark stock index retreated from an 18-month high. Ten-year Treasury yields rose for a third straight day, adding two basis points to 1.72 per cent. Silver and gold lost more than 1 per cent as the Dollar Index halted a three-day slump, with the US currency strengthening against 14 of 16 peers.

Stocks turned lower as Republican House Speaker John Boehner said the White House is not serious about cutting spending and "appears willing to slow-walk our economy right up to, and over, the fiscal cliff." The deadlock in talks to avoid automatic spending cuts and budget increases has whipsawed markets since the Nov. 6 election, sending the S&P 500 down as much as 5.3 per cent before a rebound that erased that decline.

"We've had good economic data yet people are still anxious to see what comes out of the negotiations in Washington," said Peter Jankovskis, who helps oversee $US3 billion of assets as co- chief investment officer at Lisle, Illinois-based Oakbrook Investments LLC. He spoke in a telephone interview. "We'll see a range-bound market until we get something definitive."

Market Leaders

Newmont Mining Corp. and Mosaic. dropped at least 2 per cent to pace losses in commodity shares. Phillips 66, the crude refiner that was spun off from ConocoPhillips in May, dropped 3 per cent on plans to raise as much as $US400 million in an initial public offering. CVS Caremark Corp., the largest provider of prescription drugs in the US, climbed 2 per cent after forecasting profit that beat analysts' estimates. Best Buy Co. jumped 16 per cent on a report that founder Richard Schulze will offer to take the company private by Dec. 15.


The S&P 500 rose as much as 0.2 per cent in early trading and 10-year yields climbed more than four basis points. First- time claims for unemployment insurance declined by 29,000 to 343,000 last week, the lowest level since early October and adding to evidence the labor market is improving. US retail sales increased 0.3 per cent in November amid rebounding demand for automobiles and holiday shopping.

Treasury Auction

Treasuries remained lower following an auction of $US13 billion of 30-year bonds that drew a yield of 2.917 per cent, compared with a forecast of 2.889 per cent in a Bloomberg News survey of six of the Federal Reserve's 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.5, versus an average 2.61 at the past 10 sales.

"It was a good set of data," said Tom Porcelli, chief US economist in New York at Royal Bank of Canada's RBC Capital Markets unit, one of 21 primary dealers that trade with the Federal Reserve. "It appears the labor market got a little bit of a boost in November. Combine that with a better sales outcome, and the Treasury market reaction is appropriate."

The Fed said yesterday it will buy $US45 billion of Treasuries per month starting in January, in addition to its existing $US40 billion monthly purchases of mortgage debt. Interest rates will stay low "at least as long" as unemployment remains above 6.5 per cent and if inflation is projected to be no more than 2.5 per cent, it said.

"The unemployment rate is declining just about 1 per cent a year for the past two years, and could be not far off 6.5 per cent in 12 months," Fred Goodwin, a strategist at State Street Corp. in London, wrote in a research note. "The Fed is horrific at forecasting. They have completely underestimated how fast the unemployment rate would fall from the beginning of this cycle. Why are they suddenly going to get this right?"

Fed Reaction

While the Fed's announcement sparked a brief rally in US stocks yesterday, most of the gains were erased after Fed Chairman Ben S. Bernanke said that monetary stimulus can't fully offset the effect of the so-called fiscal cliff, a term used to describe the automatic tax increases and budget cuts set to go into effect next year.

The Stoxx Europe 600 Index declined 0.4 per cent, ending the longest run of gains in 19 months. Volvo AB, the world's second- largest truckmaker, slid 4.3 per cent as Renault SA sold its 6.5 per cent stake for 12.8 billion kronor ($US1.92 billion) to boost funding. Renault, France's second-biggest automaker, climbed 1.5 per cent.

'Critical Levels'

Centamin Plc, a gold producer in Egypt, plunged 47 per cent in London trading after halting production as a diesel dispute cut supplies to "critical levels." Centamin said that it was sent an "illegal retrospective claim" by Egyptian General Petroleum Corp. for $US65 million for diesel and won't receive fuel for its Sukari mine until the amount is paid.

The Egyptian pound dropped as much as 0.3 per cent to 6.1786 per dollar, the weakest level since Dec. 2004.

Silver, coffee, gold and natural gas lost more than 1 per cent to lead declines in the S&P GSCI Index of commodities, which slipped 0.6 per cent. New York-traded crude oil fell 0.4 per cent to $US86.44 a barrel.

The euro strengthened against 13 of 16 major peers after European Union finance ministers agreed to put the central bank in charge of all euro-area lenders in a deal that will pave the way for a firewall fund to provide direct bailouts.

Euro-area finance ministers approved the release of the next aid payment to Greece today, Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels. He said money should start flowing as soon as next week.

The MSCI Emerging Markets was little changed following a six-day rally that drove it to the highest level since April 3.

The MSCI Asia Pacific Index climbed 0.2 per cent for an 11th straight gain, the longest-winning streak in more than three years. China's yuan appreciated the most since March, strengthened 0.3 per cent to 6.2329 versus the dollar. The yen weakened against all but two of its 16 major peers, sliding most against the Swiss franc and South Korean won. The Bank of Japan is due to hold a policy meeting on Dec. 19-20.