U.S. Stocks Trim Advance, Treasuries Gain on Korea Concerns

U.S. stocks trimmed gains and Treasuries rose as concern that tensions between North and South Korea were escalating triggered a flight from risky assets. Gold futures rallied 1 percent, the most in a week.

The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,166.59 at 4:19 p.m. in New York after gaining as much as 0.7 percent earlier. The iShares MSCI South Korea Index Fund, a U.S. exchange traded fund tracking stocks in that nation, erased a 1.4 percent gain and slid 0.6 percent as a South Korean naval vessel sank near the border of North Korea. Trading of puts, which give investors the right to sell the fund, surged to a record. Futures on South Korea’s Kospi 200 Index expiring in June lost 0.6 percent.

“This is really all about that variable we call the geopolitical; it’s about Korea,” said Peter Kenny, a managing director in institutional sales at Knight Equity Markets LP in Jersey City, New Jersey. “It’s taken some of the euphoria out of the market.”

The earlier rally in U.S. equities came as analyst upgrades and takeover speculation boosted financial and retail companies and concern eased over a possible Greece default. RadioShack Corp. jumped 8.5 percent on a New York Post report that the electronics chain is considering a sale of the company. Apple Inc., Progressive Corp., Urban Outfitters Inc. and SLM Corp. advanced after analysts either raised price targets or lifted their ratings on the shares.

The Dollar Index, which tracks the currency against six major trading partners, slipped 0.6 percent to 81.602.

Korea Concern

The iShares MSCI South Korea Index Fund fell 0.6 percent to $48.74 in New York. Trading of put options that give the right to sell the ETF surged to a record of more than 55,000 contracts. The most-active contracts were April $45 puts, which jumped 40 percent to 35 cents.

The South Korean naval vessel sank off Baengnyeong island in the Yellow Sea, near the border with North Korea, an official in the office of President Lee Myung Bak said. The cause was unclear, he said. About 50 crew members were still being searched for, with 58 rescued, said the official, who declined to be identified in accord with government policy. President Lee convened a meeting of security officials to discuss the incident, said the official, giving no further details.

Greece Aid

The early rally in stocks also came as European leaders backed a proposal late yesterday for a mix of International Monetary Fund and bilateral loans for Greece, while saying the nation probably won’t need help to cut the region’s biggest budget deficit. The U.S. economy grew at a 5.6 percent annual rate last quarter, the government said, and the Reuters/University of Michigan final consumer sentiment gauge for March topped forecasts as the pace of job cuts slowed.

“The transition from an economy that’s been driven by monetary and fiscal stimulus back to more of a traditional, consumer and business-driven growth may provide some opportunities,” said Greg Woodard, portfolio strategist at Manning & Napier in Fairport, New York, which manages $28 billion. “But it’s probably to provide some more volatility as we move through 2010.”

Treasuries rose for the first time in four days, sending yields down, as lower-than-average demand at this week’s record- tying $118 billion note auctions pushed yields to levels that encourage buying.

The two-year yield dropped 4 basis points, or 0.04 percentage point, to 1.05 percent. Yields on 10-year notes decreased 3 basis points to 3.86 percent after rising yesterday to 3.92 percent, the highest level since June 11.

Treasury Demand

Demand waned at this week’s auctions of two-, five- and seven-year notes as signs of improvement in the economy boosted appetite for higher-yielding assets. At the seven-year sale yesterday, investors bid for 2.61 times the amount of debt on offer, the least in 10 months.

President Barack Obama has increased U.S. marketable debt to a record $7.4 trillion as he borrows to sustain the U.S, economic expansion.

Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates. Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”

“I’m very much concerned about the fiscal situation,” said Greenspan. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”

Euro Gains

The euro strengthened 1 percent to $1.3410 against the dollar and the Athens Stock Exchange’s ASE Index climbed 4.1 percent, the most since Feb. 9. The yield on the two-year Greek note tumbled 20 basis points to 4.46 percent.

“Investors see the agreement as a backstop, and it is helping sentiment towards the euro,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, of the Greek accord reached in Brussels. “However, this is a rather uninspired recovery and it’s difficult to say that this is an unequivocal vote of confidence.”

The MSCI World Index of 23 developed nations’ stocks increased 0.2 percent.

European stocks fell, with the Stoxx Europe 600 Index losing 0.5 percent to trim a fourth straight weekly gain, on concern mounting government debt may derail the economic recovery even after the European Union agreed a Greek aid plan.

‘No Choice’ for Europe

Unipol Gruppo Finanziario SpA sank 7.7 percent in Milan, the most in a year, after Italy’s third-largest insurer announced a share sale and posted a full-year loss. Veolia Environnement SA, the world’s largest water company, slipped 1.1 percent in Paris after JPMorgan Chase & Co. advised selling the stock.

“Europe has no choice but to solve the Greece situation,” said Bruce McCain, chief investment strategist at Cleveland- based Key Private Bank, which manages $25 billion. “If you have confidence solving the debt crisis, the euro will rise against the dollar. However, the buyers of stocks over there will be discouraged to buy because of the weakness of their economies.”

The MSCI Asia Pacific Index increased 1 percent, its biggest advance in more than a week. The Kospi closed 0.6 percent higher before the South Korean ship sank. Japan’s Nikkei 225 Stock Average rose to the highest level since October 2008 and the Shanghai Composite Index rallied 1.3 percent.

Emerging Markets

China helped lead the MSCI Emerging Markets Index 0.4 percent higher, its first gain in three days. Brazil’s Bovespa index climbed 0.4 percent. Russia’s Micex Index increased 0.6 percent after the central bank cut its main refinancing rate for the 12th time in less than a year, lowering it a quarter point to 8.25 percent.

Nickel for delivery in three months rose 3.4 percent to $23,600 a metric ton on the London Metal Exchange to lead industrial metals higher. Copper, lead and tin also advanced.

Gold for June delivery added 1 percent to $1,105.40 an ounce on speculation demand will increase amid escalating debt concerns and the Korea incident.

Crude oil fell for a third day, retreating 0.7 percent to $80 a barrel in New York after climbing as much as 1.2 percent earlier.