Stocks soar on earnings and new U.S. plan to avert default

U.S. stocks surged and Treasury bond yields fell Tuesday after President Obama signaled possible support for a bipartisan plan to slash federal spending.

The Dow Jones industrial average rose 202.26 points, or 1.6%, to 12,587.42, for its biggest one-day gain since Dec. 1.

The Standard & Poor’s 500 index also rose 1.6% and the Nasdaq composite jumped 2.2%.

The market had rallied early in the day as financial tensions eased in Europe and as investors reacted to strong quarterly earnings reports from companies including IBM Corp., Coca-Cola Co., Wells Fargo & Co. and Harley-Davidson Inc.

Market bulls have been steadfast that earnings reports would save them, and that’s looking like the right call.

“The bears have spent a lot of time and capital trying to sell this market,” said Jon Najarian, a veteran trader at Optionmonster.com in Chicago. “But they just can’t knock it down.”

The Dow now is just 1.7% below its multiyear high of 12,810 reached April 29.

Wall Street got a further boost Tuesday after Obama said a spending package crafted by the so-called Gang of Six bipartisan group of senators was “broadly consistent with the approach I’ve urged” and called it a “very significant step” in the months-long negotiations over raising the nation’s debt ceiling.

U.S. markets have been on edge as Republicans and Democrats appeared to be at a stalemate over the need to raise the $14.3-trillion federal debt ceiling by the Aug. 2 date set by the Treasury.

GOP leaders have been threatening to refuse to lift the ceiling, triggering a potential default on U.S. bonds, unless the White House agreed to significant spending cuts.

Obama’s willingness to discuss the Gang of Six proposal raised hopes that the debt ceiling brinkmanship is ending.

That lured some investors back to Treasury bonds. The yield on 30-year T-bonds fell to 4.18% from 4.31% on Monday. The 10-year T-note slipped to 2.87% from 2.93%.

The Treasury market has been relatively calm in recent days even in the face of a potential debt default and after warnings last week by Moody’s Investors Service and by Standard & Poor’s that they may cut the nation’s AAA bond rating.

Despite those threats, U.S. bonds have been playing their traditional role of a haven amid Europe’s deepening government debt crisis, as yields continued to surge on bonds of the continent’s weakest economies, including Portugal, Ireland and Spain.

European bond yields pulled back a bit Tuesday as investors awaited a Thursday summit of European leaders to discuss plans for a second bailout of Greece.

The yield on two-year Italian bonds fell to 4.26% from a three-year high of 4.57% on Monday.

Spain was able to sell $5.3 billion of one-year debt, but at a steep price: It paid a yield of 3.7%, up from 2.7% at the last such sale in June.

European stock markets posted modest gains after a steep sell-off in recent days. The Italian market rose 1.9% after diving 3.1% on Monday. The French market rose 1.2% and Spanish shares added 1%.

tom.petruno@latimes.com