S&P recovers alongside Portugal's Banco bailout

The Standard & Poor’s 500 Index rose, after the worst week in more than two years, and European bonds gained with equities after Portugal announced a bailout for Banco Espirito Santo SA.

The S&P 500 (CME:SPU14) increased 0.2% at 9:30 a.m. in New York after tumbling 2.7% last week. Portuguese 10-year yields slid eight basis points to 3.62% while the Stoxx Europe 600 Index added 0.2%. Shares in Shanghai climbed to the highest close this year and Asian currencies strengthened. Commodities rebounded after a four-day decline.

About $1.2 trillion was wiped from the value of global equities last week amid concern that a default by Argentina and the crisis at Espirito Santo would constrict credit markets as the Federal Reserve debates the timeline for interest-rate increases. Espirito Santo will get €4.9 billion ($6.6 billion), Portugal’s central bank said. Warren Buffett’s Berkshire Hathaway Inc. rose 1.8% after earnings topped estimates.

“We’re seeing a reprieve of geopolitical concerns, which is modestly emboldening risk-taking for today,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said in a phone interview. “The economy overall is moving forward with better-than-expected earnings, and we see an upward bias continuing over the next couple of months.”

Portugal’s central bank now controls Espirito Santo, easing concern that the lender’s woes may spread. Most of its assets will be moved into a new company, Novo Banco. The lender’s shareholders and junior bondholders will be left with the most “problematic” loans, including those to other parts of the Espirito Santo Group, the central bank said in a statement yesterday.
 

Idiosyncratic Event
 

Spanish and Italian government bonds rallied with Portuguese securities. Spain’s 10-year yield fell seven basis points to 2.49%, approaching the record-low 2.45% set on July 30. The rate on similar-maturity Italian debt dropped six basis points to 2.70%.

Treasury 10-year note (CBOT:ZNU14) yields slipped one basis point to 2.48%.

“We’re seeing this as an idiosyncratic event,” Nicola Marinelli, who helps manage around $190 million of assets at Sturgeon Capital Ltd. in London, said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “If it spreads then yes, we could see definitely a spillover into the government bonds of peripheral countries but that’s not the case so far. It’s actually going to be good.”
 

Fed Watch
 

The S&P 500 had its worst week since June 2012, as companies around the globe including Exxon Mobil Corp. posted disappointing results, Argentina defaulted and Espirito Santo was ordered to raise capital.

Concern has grown that the improving U.S. economy may force the Fed to raise interest rates sooner than expected. Data last week showed U.S. gross domestic product expanded at a 4% annual pace in the second quarter, confirming the Fed’s view that a first-quarter contraction was transitory. A separate report on Aug. 1 showed employers in the U.S. added more than 200,000 jobs for a sixth straight month in July, the longest such period since 1997.

Some 72 companies including Walt Disney Co. and Time Warner Inc. report earnings this week. Of the companies that have posted results so far this season, 76% beat earnings estimates and 65% exceeded sales projections, according to data compiled by Bloomberg.

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