S&P 500 Extends Best Month Since 1974

Stocks surged, extending the biggest monthly rally for the Standard & Poor’s 500 Index since 1974, and the euro strengthened as European leaders agreed to expand a bailout fund to stem the region’s debt crisis. Treasuries sank, while metals and oil led a rally in commodities.

The S&P 500 jumped 3.4 percent to 1,284.59 at 4 p.m. in New York, sending its October gain to 14 percent and erasing its 2011 loss. The 20 percent monthly advance for the Dow Jones Transportation Average, a proxy for the economy, is the biggest since 1939. Benchmark gauges in France, Italy and Germany rose more than 5 percent as German and emerging-market stocks extended gains from this year’s lows to more than 20 percent. The euro surged the most in more than a year and 10-year Treasury note yields rose 17 basis points to 2.38 percent.

Equities, commodities and the euro rallied as the European region’s rescue fund was boosted to 1 trillion euros ($1.4 trillion) and investors agreed to a voluntary writedown of 50 percent on Greek debt. French President Nicolas Sarkozy spoke with Chinese leader Hu Jintao as Europe sought help in funding the bailout effort. U.S. data showed the world’s largest economy expanded last quarter at the fastest pace in a year, easing concern that the economy may relapse into a recession.

“Europe has done enough for the time being,” Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., said in a telephone interview. His firm oversees $3.3 trillion as the world’s largest asset manager. “It will remove near-term pressure,” he said. “In the U.S., the GDP report was decent and it was encouraging to see the consumer hold. The fear of a recession is fading.”

Bull Markets

JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. surged at least 8.3 percent to pace gains in all 81 financial companies in the S&P 500 today, sending the group up 6.2 percent and extending its advance from this year’s low to almost 25 percent. A gain of at least 20 percent from a bear- market low is the common definition of a bull market. The MSCI Emerging Markets Index, Germany’s DAX Index, Brazil’s Bovespa and Russia’s Micex have each surged more than 20 percent from their 2011 lows.

The S&P 500 rose to its highest level in almost three months and has rebounded 17 percent since Oct. 3, when it closed at the lowest level since September 2010. The advance has been fueled by better-than-estimated corporate earnings and economic data and growing confidence that European leaders would make progress in combating the sovereign debt crisis.

Earnings Season

More than half of the companies in the S&P 500 have released quarterly results since Oct. 11, and about three- quarters have beaten the average analyst estimate, data compiled by Bloomberg show. Net income has grown 16 percent for the group on an 11 percent increase in sales.

The Citigroup Economic Surprise Index for the U.S. this week climbed to the highest level in six months, reaching 17 on Oct. 24. The index increases when data exceeds economists’ estimates. The gauge has rebounded from minus 117.20 on June 3, when it showed reports were trailing the median economist projection in Bloomberg surveys by the most since January 2009.

The U.S. economy grew at a 2.5 percent annual rate in the third quarter, matching the median forecast of economists surveyed by Bloomberg, according to figures from the Commerce Department. Household purchases, the biggest part of the economy, increased at a more-than-projected 2.4 percent pace.

European Banks

The Stoxx Europe 600 Index climbed 3.6 percent to a 12-week high as banks led gains. BNP Paribas (BNP) SA and Deutsche Bank AG, the biggest lenders in France and Germany, advanced more than 15 percent. BASF SE rallied 7.5 percent as the world’s largest chemicals maker reported profit that beat estimates. Ericsson AB rose 6.1 percent as Sony Corp. agreed to buy its 50 percent stake in their joint mobile-phone venture.

The 10-year German bund yield jumped 17 basis points to 2.21 percent, while the 10-year Spanish yield fell 15 basis points to 5.33 percent. That drove the difference in yield with German debt down by 32 basis points to 3.12 percent, the lowest since Oct. 14 on a closing basis.

Even after today’s gains, the bonds of some of Europe’s most-indebted countries are still trading near their historical lows. Greece’s two-year yield slid 285 basis points to 76.91 percent today, compared with an average of 27 percent in the past year. Italy’s 10-year yield, which averaged 4.93 percent in the past 12 months, fell five basis points to 5.87 percent.

‘A Red Flag’

“If we’re not seeing the sovereign debt markets turn around, that is a red flag,” Michael Darda, the Stamford, Connecticut-based chief economist and chief market strategist at MKM Partners LP, told Bloomberg Television. “Equity markets have gotten optimistic here. One of the things that bothers me is the euro-zone debt markets have not registered the same degree of optimism, and that’s really the core of the problem.”

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropped 46 basis points to a mid-price of 287, the lowest in almost two months.

The EU agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association’s rules. ISDA will decide if the credit-default swaps should pay out depending on whether it judges losses to be voluntary or compulsory.

‘Voluntary Bond Exchange’

European leaders said in the agreement they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new debt.

Other measures in the bailout plan include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.

“The moves we saw last night were clearly better than the markets anticipated, it seems to have cut out some of the risk,” Jeffrey Palma, global equity strategist at UBS AG, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “This certainly gives some sort of clarity to what is going on in Europe, but we’ll probably have other iterations to come.”

Treasuries extended losses after the U.S. sold $29 billion of seven-year debt, the last of three auctions this week totaling $99 billion. The notes drew a yield of 1.791 percent, compared with a record low 1.496 percent at the last offering. The yield on existing seven-year notes increased 14 basis points to 1.80 percent