Gold rises on debt talks; stocks up slightly

By Caroline Valetkevitch

NEW YORK |

(Reuters) - Concern about the government's ability to avoid a default boosted gold for a 10th straight day on Friday, while stocks rose after strong corporate earnings from companies including Google (GOOG.O).

Investors' search for safe havens on fears over the outcome of debt talks also pushed up government bond prices.

An acrimonious stalemate between President Barack Obama and Republicans deepened on Friday in their negotiations over a plan to raise the debt ceiling while cutting the deficit.

Congress must raise the $14.3 trillion limit on America's borrowing by August 2 or the government will run out of money to pay all its bills. The White House and Republicans are wrangling over spending cuts and higher taxes in addressing how to bring down the deficit.

The two major ratings agencies warned they will strip the United States, the world's biggest economy, of its top-notch credit rating if it does not increase its borrowing limit to avoid a default.

"Everything that's bad is good for Treasuries even if there's a default," said Thomas Roth, executive director of government bond trading at Mitsubishi UFJ Securities USA Inc in New York.

There is a growing, though far from consensus, view that while a United States default would hurt the credit-worthiness of Treasuries, it would devastate stocks and risky investments even more, making investors scramble for Treasuries to store cash.

"Treasuries look the best of a bad lot. The U.S. will make good on its payments despite a short-term disruption," said Anthony Valeri, fixed income strategist at LPL Financial in San Diego, which manages $280 billion in assets.

On Wall Street, the Dow Jones industrial average .DJI rose 42.61 points, or 0.34 percent, to end at 12,479.73. The Standard & Poor's 500 Index .SPX was up 7.27 points, or 0.56 percent, at 1,316.14. The Nasdaq Composite Index .IXIC was up 27.13 points, or 0.98 percent, at 2,789.80.

Google's earnings beat the most bullish forecasts late on Thursday, driving its stock up 13 percent to $597.62, making it the top gainer in the Nasdaq 100.

Energy and tech shares led the day's gains. The S&P energy sector index .GSPE rose 2.3 percent, while the S&P info technology sector index .GSPT gained 1.6 percent.

The FTSEurofirst 300 .FTEU3 index of leading European shares ended down 0.2 percent, while the MSCI All-Country World Index .MIWD00000PUS rose 0.2 percent.

Also gaining was spot gold, which was up 0.3 percent at $1,591.50 an ounce. It failed to hit a new peak after rallying to all-time highs in the previous two sessions, but stayed near the record of $1,594.16 hit on Thursday.

"The longer the debt talk drags on, the more you would want to own a safe haven like gold. The crude oil market is also rallying quite nicely, and that's a big element in support for gold," said James Steel, chief commodity analyst at HSBC.

EURO FLAT AFTER EUROPE STRESS TESTS

The euro turned flat against the dollar as the results of European bank stress tests only slightly relieved anxiety over euro zone debt woes.

In late afternoon New York trading, the euro was nearly unchanged at $1.4148, above a four-month low of $1.38376 hit this week.

Just eight of the 90 European banks surveyed by the European Banking Authority failed the stress tests, well below market expectations that as many as 15 lenders would need more capital to withstand a prolonged recession.

The test results, which were released after European stock markets had closed, measured the banks' ability to withstand a prolonged recession that did not build in the impact of a Greek default.

"To be honest, I am pretty skeptical of the results and find it hard to believe that only eight failed," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Euro zone leaders will meet in Brussels next Thursday to discuss a second bailout package for Greece and the financial stability of the euro area, European Council President Herman Van Rompuy said on Friday.

The more investors fear that heavily indebted euro-zone governments will be unable to repay their debts, the more the yields on their bonds rise, dragging down their value in banks' balance sheets, erasing their capital, and increasing the need for yet more bank bailouts by stronger euro-zone governments.

U.S. Treasury prices rose modestly as the sovereign debt problems on both sides of the Atlantic fueled safe-haven demand.

Adding to concerns for the United States, S&P threatened on Friday to downgrade mortgage finance agencies Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) and some financial companies if it removes the United States' AAA rating.

Benchmark 10-year Treasury notes were trading 13/32 higher in price to yield 2.91 percent, down from 2.96 percent late Thursday.

Wall Street's advance helped boost oil prices.

U.S. crude for August delivery settled at $97.24 a barrel, gaining $1.55 and rising for a third straight week. The September contract closed at $97.60, up $1.49, or 1.55 percent.

In London, ICE Brent for September delivery, the new front month, closed at $117.26, up $1.

(Additional reporting by Dominic Lau in London; Richard Leong, Frank Tang, Julie Haviv and Angela Moon in New York; and Steve Holland and Andy Sullivan in Washington; Editing by Leslie Adler)