NEW YORK (Reuters) - World stocks climbed to their highest levels in more than 27 months on Wednesday and the S&P 500 headed for its best December in nearly two decades as investors seized on indications of stronger economic growth in 2011.
U.S. Treasuries rose after strong demand for an auction of $29 billion (£18.7 billion) in new U.S. debt provided relief a day after dismal support for another government note sale. The decline in Treasuries yields drove the dollar down against a basket of major currencies .DXY, as lower bond yields erode the return on U.S. assets.
Investors have been turning to riskier assets as 2010 draws to a close. Views that the world economy is on the mend are driving expectations that the higher interest rates that typically follow stronger growth will hurt returns on government bonds and the other safe-haven assets that drew favour after the financial crisis erupted.
Asset allocations are seen by many analysts, including some bond pickers, as favouring stocks in the new year.
“The first few days of the new year will be good as a lot of new money will flow into the market,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels. “But people will become cautious again.”
Much of stocks’ gains came after Federal Reserve Chairman Ben Bernanke made it clear in August that the U.S. central bank was willing to buy more assets in order to pump liquidity into the slowing U.S. economy.
The Fed’s quantitative easing and tax stimulus measures have bolstered economic forecasts for 2011.
In New York, the Dow Jones industrial average .DJI rose 9.84 points, or 0.09 percent, to 11,585.38. The Standard & Poor's 500 Index .SPX added 1.27 points, or 0.10 percent, to 1,259.78 and the Nasdaq Composite Index .IXIC edged up 4.05 points, or 0.15 percent, to 2,666.93.
The S&P 500 has risen almost 7 percent this month, pushing the benchmark index above levels reached on September 12, 2008, the last trading day before Lehman Brothers collapsed, as improving economic data and a changed political landscape have encouraged risk-taking.
Shares of a number of leading consumer-oriented companies posted solid gains on Wednesday, with McDonald's Corp MCD.N up 1.1 percent to $77.27 and Walt Disney Co DIS.N rising 0.9 percent to $37.69. Both companies are Dow components.
“People are hoping that the consumer is back and that will help fuel the engine and grow some earnings so that companies will start hiring,” said Frank Ingarra, a portfolio manager at Hennessy Funds in Stamford, Connecticut.
Some analysts, however, remained cautious about the outlook for stocks, wary that thin volumes over the holiday period may not be indicative of a trend.
“I don’t want to dismiss the recent gains, but I’m not ready to draw a trend line,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “I’d like to see how the market responds when we have more participants and tangible news to sink our teeth into.”
The Nasdaq, copper and gold have been the big winners this year. For a Reuters graphic, see r.reuters.com/veq33r
In Europe, the FTSEurofirst 300 .FTEU3 rose about a quarter of a percent, extending a year-end rally and putting equities on track to post their biggest monthly gain in 17 months.
Japan's Nikkei .N225 gained 0.5 percent.
TREASURIES IN FOCUS
U.S. Treasury notes prices rose on Wednesday. The gains came after a drubbing on Tuesday, following a weak $35 billion five-year note auction, boosted value to a point where investors could feel more comfortable with the drumbeat of debt sales the government must conduct to fund its deficit.
U.S. bond yields have soared a full percentage point since October on expectations that growth will accelerate in 2011, while concerns over the U.S. deficit have raised inflation fears and sapped demand for the debt. Some investors, including Jeffrey Gundlach, the chief executive of DoubleLine Capital, have marked the sell-off as a bond buying opportunity because much higher yields would work against economic growth.
On Wednesday, the 10-year U.S. Treasury yield declined 0.14 percentage point to 3.35 percent.
In currency trading, the dollar hit a seven-week low and dropped versus the euro, after Treasury yields tumbled following the U.S. debt auction.
“The reaction in the bond markets is fairly sharp,” said Vassili Serebriakov, currency strategist at Wells Fargo in New York. “There’s a broader move towards a weaker U.S. currency.”
Commodity gains boosted the Australian and New Zealand dollars, while the euro edged up against the U.S. dollar after holding above its 200-day moving average.
Most analysts are bracing for more euro weakness in early 2011, but the currency’s stubborn refusal to break below the 200-day moving average, now at $1.3084, has frustrated bearish investors.
The dollar fell against major currencies, with the U.S. Dollar Index .DXY off 0.7 percent at 79.799. Against the yen, the dollar dropped 1 percent to 81.64 yen . The euro rose 0.75 percent to $1.3216.
In commodities, U.S. light sweet crude oil settled down 37 cents, or 0.4 percent, to $91.12 a barrel. Gold rose $4.61, or 0.33 percent, to $1410.60.
Additional reporting by Brian Gorman and Atul Prakash in London, and Steven C. Johnson, Chuck Mikolajczak and Ryan Vlastelica in New York; Editing by Leslie Adler; Graphic by Scott Barber
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