August 15, 2012 / 12:31 AM / in 5 years

Stocks firm; bonds fall on stimulus uncertainty

NEW YORK (Reuters) - U.S. stocks were steady on Wednesday, holding close to their highest level since May on hopes of more central bank stimulus for struggling economies, but uncertainty about the extent and timing of any moves hurt the euro and safe-haven U.S. and German government bonds.

Oil prices in London clung near three-month peaks, boosted by worries about supply disruption due to Mideast tensions, while a focus on some weaker-than-expected U.S. economic data pushed gold back above $1,600 an ounce.

Stock markets have been riding high in recent weeks on hopes that European Central Bank plans expected to be detailed in September can put a floor under Spain and Italy’s debt troubles and prevent the euro zone from unraveling.

Traders have also raised bets the U.S. Federal Reserve will embark on a third round of large-scale bond purchases, known as QE3, perhaps as soon as its next policy meeting in September.

While recent weak economic data in Europe and Asia supported the view that more monetary stimulus is needed to avert a global recession, surprisingly strong July figures on U.S. employment and retail sales recently caused some traders to reconsider the expected timing on QE3.

“While one or two data points alone will not meaningfully alter the outlook for Fed monetary policy, additional upside surprises to U.S. data over the coming weeks would indeed see investors scale back expectations for additional Fed easing,” said Omer Esiner, chief analyst at Commonwealth Foreign Exchange in Washington.

Data on Wednesday added to evidence the U.S. economy may not be as weak as previously feared. The Federal Reserve reported a 0.6 percent increase in industrial output in July, and a separate private-sector report showed that a gauge of home builder confidence hit its highest level in more than five years in August.

But a report from the New York Federal Reserve showed manufacturing in New York state contracted for the first time in 10 months. The New York Fed’s Empire State index provides one of the earliest monthly guideposts to U.S. factory conditions.

Investors took solace for now that a sluggish U.S. economy would not result in a severe deterioration in consumer demand and corporate profits, supporting some appetite for equities.

The Standard & Poor's 500 index .SPX has lingered around the 1,400 point mark, close to a four-year high. Analysts said Wall Street will likely stay around current levels through options expiration on Friday. .N

The Dow Jones industrial average .DJI ended down 7.43 points, or 0.06 percent, at 13,164.71. The S&P 500 Index .SPX closed up 1.57 points, or 0.11 percent, at 1,405.50. The Nasdaq Composite Index .IXIC finished up 13.95 points, or 0.46 percent, at 3,030.93.

Traders work at their desks at the Frankfurt stock exchange August 9, 2012. REUTERS/Alex Domanski

Top European shares .FTEU3 closed 0.11 percent lower at 1,100.74 points, while the global MSCI index .MIWD00000PUS ended 0.09 percent lower at 322.73, just 1 point below its highest level set on Tuesday.

The uncertainty over the timing of more central bank stimulus spurred selling in U.S. Treasuries and German Bunds.

Benchmark 10-year Treasury yields rose to 1.8103 percent, the highest level since May 16, according to Reuters data. The 10-year yield broke above its 100-day moving average on Tuesday, a move that portended yields might rise further.

“The lack of bad news means that the path of least resistance is for higher yields,” said Ira Jersey, interest rate strategist with Credit Suisse in New York.

German Bund futures fell 95 basis points to 141.48, the lowest level since July 3. <GVD/EUR>

Higher U.S. bond yields helped boost the U.S. dollar against the yen. The greenback was last up 0.19 percent at 78.87 yen after touching 79.04 yen, a one-month high.

In line with the sell-off in stocks and lingering concerns about Europe’s economy, the euro was down 0.28 percent at $1.2286 after hitting a session low of $1.2262 earlier.

In commodities trading, tensions in the Middle East and supply concerns pushed up oil prices to their highest levels in three months, with worries that Israel could launch an attack on Iran in the coming months.

U.S. inventories of crude oil measured by the Energy Information Administration dropped by 3.7 million barrels, greater than a forecast drop of 1.7 million, which pointed to tight supply on either side of the Atlantic.

Brent crude futures rose $2.19, or 1.92 percent, to $116.22 a barrel, while U.S. oil futures settled up 90 cents, or 0.96 percent, at $94.33 a barrel. <O/R>

Gold rose nearly $6, or 0.36 percent, at $1,603.80 an ounce after dipping to a near two-week low on Tuesday. <GOL/>

Additional reporting by Chuck Mikolajczak and Karen Brettell in New York, Marc Jones, Jan Harvey and Anirban Nag in London; Editing by Dan Grebler and Leslie Adler

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