Euro drops, bonds rise after Merkel comments

NEW YORK: The euro fell broadly on Wednesday after comments by German Chancellor Angela Merkel reignited worries about the euro zone debt crisis and government bond prices rose over fears of slow economic growth.

In a seeming contradiction to the growth fears among bond investors, U.S. and European stocks jumped, lifted by solid corporate results on both sides of the Atlantic. The benchmark S&P 500 touched its highest level since early May.

Investors who have worried about the impact of a limping global economy on earnings took comfort from corporate results.

Profits at diversified manufacturer Honeywell Inc topped consensus views amid what the company called a "tough macroeconomic environment," and top chipmaker Intel Corp reported healthy gross margins after reducing its growth forecast.

In Europe, the world's largest chip equipment maker, ASML , as well as leading Scandinavian bank Nordea and Norwegian fertilizer maker Yara International all beat forecasts.

Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh, said companies are generating less revenue than forecast but earnings are still above expectations.

"Analysts have moved their targets (lower), and companies still are lean and mean and are able to generate profit," she said.

U.S. Treasury debt prices rose as investors turned defensive on persistent economic worries and financial contagion from the euro zone, which pushed bond yields toward historic lows.

The euro stumbled to its lowest level in 3-1/2 years against the British pound and extended broad losses against other currencies after Merkel's comments. The single currency hit a record low against the Australian dollar and an 11-1/2-year low against the Swedish crown.

"We have not yet shaped the European project so that we can be sure that everything will turn out well, we still have work to do," Merkel was quoted in a media report as saying.

The German chancellor also reiterated her belief that the euro will survive, saying she was "optimistic that we will succeed."

"It's all about Merkel comments," said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York. "The mere fact that Merkel made a comment about the euro project has raised concern."

The euro fell 0.1 percent to $1.2279, and the U.S. dollar index was down 0.06 percent at 82.985.

The sale of 4.17 billion euro of zero coupon two-year German bonds drew the strongest demand since January, as investors paid Berlin to park cash in its two-year debt at auction for the first time ever.

Ten-year Bund yields were 3 basis points lower at 1.20 percent, not far from the record low of 1.13 percent hit in January.

The benchmark 10-year U.S. Treasury note was up 5/32 in price to yield 1.4908 percent.

A rebound in tech stocks lifted Wall Street. Intel late Tuesday cut its full-year revenue outlook, the latest tech company to warn about slowing demand, but its shares rebounded 3.66 percent to $26.31 and lifted technology shares.

The PHLX semiconductor index jumped 3.6 percent a day after hitting its lowest level to date this year.

"The main driver is technology and that is driven by Intel," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles. "People were overly pessimistic on Intel and semiconductors in general going into Intel's report and guidance last night, so it's a 'buy the news.'"

The Dow Jones industrial average closed up 103.16 points, or 0.81 percent, at 12,908.70. The Standard & Poor's 500 Index rose 9.11 points, or 0.67 percent, at 1,372.78. The Nasdaq Composite Index climbed 32.56 points, or 1.12 percent, at 2,942.60.

The pan-European FTSEurofirst 300 index closed up 1.2 percent at 1,053.70 points, advancing to a two-week high.

Brent crude futures rose for a sixth straight session on heightened tensions in the Middle East and on comments on Wednesday by Federal Reserve Chief Ben Bernanke that were perceived as more positive about the economy than his testimony the day before.

Brent crude futures settled at $105.16 a barrel, up $1.16. U.S. crude for August delivery rose 65 cents to settle at $89.87 a barrel.

The Reuters/Jefferies CRB Index of 19 commodities was up 1.16 percent at 299.08.

Gold fell for a second session on renewed fears over Europe's debt crisis and as speculation receded that more stimulus to boost a slowing U.S. economy was imminent.

U.S. COMEX August gold futures for August delivery settled down $18.70 an ounce at $1,570.80. - Reuters