LATEST:- U.S. Markets Wrap: Stocks, Treasuries Rise on Improved Outlook

By Dakin Campbell and Matt Townsend

July 20 (Bloomberg) -- U.S. stocks rose, sending the Standard & Poor’s 500 Index to its highest level since November, as a gauge of economic indicators topped projections and speculation grew that CIT Group Inc. will avoid bankruptcy. Treasuries rose and the dollar fell.

Caterpillar Inc. and Alcoa Inc. rallied at least 3.7 percent as the Conference Board’s gauge of the economic outlook increased for a third straight month. CIT Group jumped 79 percent as a person briefed on the board’s deliberations said the lender has reached a financing agreement with bondholders. Federal Reserve Chairman Ben S. Bernanke may outline his strategy tomorrow for exiting history’s biggest monetary expansion in testimony to Congress.

“Given the general weakness of the economy and concerns over corporate profitability going into the second quarter, reports to date have been a pleasant surprise,” said Dean Gulis, part of a group that manages $2.5 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan. “This week it’s going to continue to rally. The worm has turned a little bit. People are feeling better about the economy.”

The S&P 500 added 1.1 percent to 951.13 at 4:05 p.m. in New York, above its best close since Nov. 5. The Dow Jones Industrial Average rallied 104.21 points, or 1.2 percent, to 8,848.15, erasing its loss for the year and closing at a six- month high. Treasuries rose, pushing yields down from the highest levels in almost four weeks, amid speculation Bernanke may ease inflation concerns. The dollar dropped to a six-week low against the euro.

Industry Groups

All 10 industry groups in the S&P 500 rose today, led by consumer, commodity and industrial shares. Goldman Sachs Group Inc. boosted its forecast for the index, saying improving earnings will spur the steepest second-half rally since 1982. The bank raised its year-end target for the S&P 500 to 1,060, a 15 percent increase from its projection of 940 on June 30.

Earnings topped analysts’ estimates by an average of 15 percent for S&P 500 companies that reported quarterly results since July 8, according to data compiled by Bloomberg, with 35 out of 43, or 81 percent, beating estimates.

Ten-year note yields fell the most in six days before the central bank chairman’s semiannual economic report to lawmakers at 10 a.m. tomorrow in Washington. U.S. debt fell earlier and stocks rose as CIT, seeking to stave off bankruptcy, was said to be offered financing from bondholders, damping demand for the safety of government debt.

Testimony

“The focus of Treasuries is on Bernanke’s testimony,” said Kevin Giddis, head of fixed-income sales, trading and research at the brokerage Morgan Keegan Inc. in Memphis, Tennessee. “We are caught in a summertime range trade. The general feeling is that he will say things are getting better, but make no mention of when the economy will do a full turn.”

The 10-year note’s yield fell four basis points, or 0.04 percentage point, to 3.61 percent at 5:03 p.m. in New York, according to BGCantor Market Data. It earlier touched 3.72 percent, the highest level since June 23. The price of the 3.125 percent security maturing in May 2019 rose 11/32, or $3.44 per $1,000 face amount, to 96 1/32.

The dollar fell while the yen slid as the possibility of a CIT debt restructuring encouraged higher-yield demand. The U.S. currency declined 0.8 percent to $1.4234 per euro at 5:03 p.m. in New York, from $1.4102 on July 17. It reached $1.4249, the weakest level since June 5. The yen depreciated 0.9 percent to 134.11 per euro from 132.85 after trading at 134.76, the weakest level since July 3. Japan’s currency traded at 94.22 versus the dollar, compared with 94.19.

‘Risk Assets’

“People are looking for risk assets, not with a lot of conviction, but with equities there is some appetite,” said Brian Kim, a foreign-exchange strategist in Stamford, Connecticut, at UBS AG, the world’s second-largest currency trader. “They’re leaning away from safe havens, and the dollar and yen kind of suffered.”

The Dollar Index, which the ICE uses to track the greenback against the currencies of six major U.S. trading partners, touched 78.799, the weakest level since June 3. The index, which reached the highest in almost three years on March 4 and the lowest in 2009 on June 2, traded in a range of about 1.5 points above or below 80 since the beginning of last month.

Crude oil rose for a fourth day. The commodity advanced after a measure of economic indicators signaled that the worst of the recession is over. The Conference Board’s gauge of the outlook for the next three to six months increased 0.7 percent, more than forecast, and climbed three straight months for the first time since 2004.

‘A New High’

“We’ve reached a new high on the back of the weak dollar and equity market strength,” said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. “There’s increased optimism and some earnings are better than expected.”

Crude oil for August delivery rose 48 cents, or 0.8 percent, to $64.04 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Prices reached $64.90, the highest since July 7. Oil has gained 44 percent this year.

Gold climbed to a five-week high as a weaker dollar and higher oil prices boosted the metal’s appeal as an alternative investment and a hedge against inflation.

Gold futures for August delivery gained $11.30, or 1.2 percent, to $948.80 an ounce on the New York Mercantile Exchange’s Comex division. Earlier, the price reached $955.40, the highest for a most-active contract since June 12.

“Gold is moving up today due to the lower U.S. dollar,” said Lannie Cohen, the president of Capitol Commodity Services Inc. in Indianapolis.

LATEST:- CREDIT MARKETS: Goldman Earnings Boost Market; CIT Stabilizes

   By Kellie Geressy-Nilsen
  Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Credit markets were lifted Tuesday as Goldman Sachs Group Inc. (GS) beat analysts' estimates for second-quarter earnings, helping to give a much-needed boost to the battered bank and finance sector.

Goldman posted record profits - reporting second-quarter earnings of $3.44 billion, 65% higher than last year's $2.06 billion. The better-than-expected results inspired investors and helped to buoy financial bonds and cut the cost to protect them.

Goldman credit default swaps were down sharply following the second-quarter results, quoted at 142 basis points, down from 150 basis points prior. CDS levels on other finanicals were also down, according to Phoenix Partners Group.

And risk premiums on Goldman's outstanding non-guaranteed bank debt narrowed by as many as 10 basis points, according to one bond trader.

Earnings reports from Citigroup (C), JPMorgan Chase (JPM) and Bank of America Merrill Lynch (BAC) are expected later this week.

Meanwhile, CIT Group Inc. (CIT) may be getting some aid from the federal government, but a decision on whether or not the lender will be spared from bankruptcy filing is still pending.

And despite a concrete decision by the government pertaining to aid, some think that a bankruptcy of CIT isn't imminent. Goldman Sachs analysts Louise Pitt and Joseph Schatz write that restructuring of its existing capital and debt structure is a priority which could lead to government aid. But even if CIT is able to carry out initiatives to boost its near-term liquidity, the analysts are still concerned over the viability of CIT from a longer-term funding and profitability perspective compared with larger, better-rated domestic banks.

Also Tuesday, the U.S. Department of Justice announced it had opened an investigation into the complex market for credit default swaps - a sector of the market that was a major contributor to the credit crisis.

Market Group Holdings Ltd. received a request from the DOJ's antitrust division for information relating to price transparency in the credit derivatives and related markets, according to one person familiar with the inquiry.

"We will work with the Department to provide any information requested of us," Markit said in a statement. Markit buys and distributes some news feeds from Dow Jones Newswires.

Still, credit derivative markets showed little reaction to news of the probe.

   Corporates See Moderate Activity

The high-grade corporate bond market was relatively quiet on Tuesday, as the focus remained on earnings reports.

CareFusion Corp., was in the market with a benchmark-sized three-part bond offering that included three-, five- and 10-year senior notes. Deutsche Bank, Goldman Sachs and UBS served as active bookrunners for the issue. CareFusion is set to become public from the planned spinoff of Cardinal Health's clinical and medical products businesses.

And the benchmark high-grade credit derivatives index, the Markit CDX North America Investment Grade derivatives IG12 index, was last quoted 3.5 basis points narrower on the day to 139 basis points, according to Phoenix Partners Group.

The high-yield market was generally flat, with activity again dominated by CIT Group Inc. (CIT). Several CIT issues stabilized and traded slightly higher on the day, after falling in previous days, amid reports that CIT remains in talks with the government about receiving some sort of federal aid.

Several market participants said they anticipate some sort of debt exchange offer may be in CIT's future, citing a similar offer by GMAC that reduced that company's debt burden before the government stepped in with assistance.

The cost of protection on CIT's senior bonds via credit-default swaps fell initially Tuesday, to 37 points upfront from 41 late Monday, but rose again later to 40 points upfront, according to Phoenix Partners Group, which noted that trading in the CDS was limited. That means it now costs about $4 million plus a $500,000 annual fee to insure $10 million of CIT bonds for five years.

   Commercial MBS Index Hit

Bonds backed by commercial mortgages were hit Tuesday after Standard & Poor's downgraded several CMBS issues.

The CMBX Series 5, the most recent derivatives index based on bonds backed by commercial mortgages, was down by three points to 72 cents on the dollar, according to Derrick Wulf, a senior portfolio manager at Dwight Asset Management in Burlington, Vt.

S&P cut several of these securities because of a recent change in its rating methodology.

   Mortgages and Agency Debt

Mortgages pulled back after widening earlier in the day, says John Sim of JPMorgan. According to Sim, the current coupon spread over a blend of 5-year and 10-year Treasurys narrowed about half a point to 145 basis points.

Spreads widened out even further in Agency market afternoon trading, according to Tradeweb, amid a sell-off and correspondingly rising rates in the Treasury market.

Short-term paper continued to be the hardest hit, but 5-year, 7-year and 10-year paper followed suit.

Agency spreads had narrowed into the low single digits, before the widening this week. Fannie Mae 1.375% 2-year notes were recently quoted 4 basis points wider at 8 basis points/5.3 basis points bid/offer, according to Tradeweb.

   Treasurys

Treasury prices fell again Tuesday as investors, cheered by stronger-than-forecast retail-sales data and upbeat earnings from Goldman Sachs, moved away from the relative safety of the government bond market.

Data that showed an unexpected hefty boost in producer prices also gave investors pause about heading into Treasurys, especially longer-term ones. Higher inflation hurts long-dated Treasurys as rising prices eat into fixed returns. The day's losses built on weakness Monday, when Treasurys fell as stocks rose.

Selling has put the brakes on the rebound Treasurys were making over the past month, which had pushed the 10-year note's yield down more than 50 basis points after pushing up to 4% in early June.

In afternoon trade Tuesday, the 10-year note was off 28/32 to yield 3.46%. The 10-year was yielding 3.30% on Friday. The 30-year bond was in the worst shape, down by 2 to 4.36%. The two-year note was down 2/32 to yield 0.94%. Bond yields move inversely to prices.

- By Kellie Geressy-Nilsen; Dow Jones Newswires; (212) 416-2225; kellie.geressy@dowjones.com