Oil, Bonds Climb as Stocks Drop on Libya Turmoil; Kiwi Weakens After Quake

Oil surged to a two-year high, while the Standard & Poor’s 500 Index sank the most since August, as escalating violence in Libya spurred concern that Middle East instability will hurt the world economy. Treasuries and the Swiss franc rose. New Zealand’s dollar slid after an earthquake.

Oil for March delivery jumped 8.6 percent from the Feb. 18 settlement to $93.57 a barrel. The S&P 500 Index lost 2.1 percent to 1,315.44, its biggest drop in six months, as Wal-Mart Stores Inc. tumbled after sales trailed its own forecast. The Chicago Board Options Exchange Volatility Index climbed 27 percent, the most since May. Ten-year Treasury yields slid 13 basis points and the franc gained 0.9 percent versus the dollar.

Protests in the Middle East are driving oil prices up, stoking concern corporate profits will be reduced by rising energy costs and accelerating inflation will trigger higher interest rates. Libyan leader Muammar Qaddafi vowed to fight a rebellion until his “last drop of blood” after the uprising left more than 200 dead, according to Human Rights Watch.

“If oil continues to rise and the dots get connected beyond Libya, then you can set yourself up for a setback in stocks,” said David Sowerby, a Bloomfield Hills, Michigan-based money manager at Loomis Sayles & Co., which oversees $150 billion. “People are going to wait and see what type of unrest there is in the largest producing oil countries. Risk aversion is going to be everybody’s assessment.”

Oil Rallies

Crude settled at the highest price since Oct. 3, 2008, on the New York Mercantile Exchange, while brent oil for April delivery climbed as much as 2.7 percent to $108.57 a barrel.

Traders have never been less certain whether crude will rise or fall as political unrest spreads through the Middle East and Africa, the oil-options market shows. The difference between the cost of betting on gains and declines narrowed to 0.57 percentage point on Feb. 18, an all-time low for June futures, according to data from the New York Mercantile Exchange. That’s down from more than 2 percentage points on Jan. 24, before the violence began spreading through the region.

Oil’s rally today triggered losses in other commodities amid concern rising energy prices will slow economic growth.

Copper for May delivery tumbled the most in three months, losing 3 percent to settle at $4.363 a pound in New York, and aluminum, nickel and lead retreated at least 2 percent in London. Cotton for delivery in May declined the exchange limit 7 cents a share to $1.8793 a pound in New York after touching a record $2.0893 on Feb. 18. Gold for April delivery rose 0.9 percent to $1,401.10 an ounce and silver touched a 30-year high of $34.315 an ounce.

Wal-Mart, Bank of America

The S&P 500 retreated from its highest level since June 2008 as trading resumed today after the Presidents’ Day holiday. Wal-Mart declined 3.1 percent, the most since May, after posting a seventh straight quarterly sales decline at its U.S. stores. Bank of America Corp. slid 3.9 percent after almost doubling a writedown for its credit-card unit to $20.3 billion.

All 15 stocks in the NYSE Arca Airline Index retreated, sending the gauge down 5.2 percent to the lowest level since October, amid concern rising oil prices will reduce profits. United Continental Holdings Inc. slid 9.2 percent and AMR Corp. tumbled 5.7 percent.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed to an almost three-month high of 20.8 as investors paid more for options to protect against declines in stocks.

Housing, Confidence Data

U.S. equities also declined after the S&P/Case-Shiller index of home values in 20 cities fell 2.4 percent in December from the same month in 2009, the biggest 12-month decrease in a year. Benchmark indexes briefly pared losses as a gauge of consumer confidence rose to the highest level in three years. The Conference Board’s index of sentiment rose to 70.4, topping the median forecast for a little changed reading of 65.5.

Two-year Treasury note yields touched the lowest since Feb. 3, falling as much as 7 basis points to 0.68 percent. Treasuries rallied as the violence in Libya bolstered the refuge appeal of the $35 billion in two-year notes auctioned today by the U.S. government.

The securities drew a yield of 0.745 percent, compared with a forecast of 0.752 percent in a Bloomberg News survey of seven of the Federal Reserve’s 20 primary dealers. The bid-to-cover ratio, which compares total bids with the amount of securities offered, was 3.03, the lowest since May, compared with an average of 3.40 at the past 10 sales.

The Fed bought $7.2 billion of Treasuries maturing from August 2016 to February 2018 today as part of its efforts to sustain the economic expansion.

The yield on the German 10-year bund declined four basis points to 3.15 percent. The yield on the equivalent-maturity Japanese note dropped five basis points to 1.26 percent.

European Stocks

The Stoxx Europe 600 Index lost 0.6 percent to extend a three-day retreat, with four shares falling for every one that rose. Air France-KLM Group, the region’s largest airline, tumbled 3 percent.

Italy’s benchmark FTSE MIB Index sank 1.1 percent after trading started 6 1/2 hours late because of “technical issues.” The index sank 3.6 percent yesterday, the biggest decline since June 29.

Italy is the biggest investor in Libya and Rome-based Eni Spa, the oil producer that’s drilled in the African nation during all of Qaddafi’s 41-year rule, is at the forefront of the relationship. Italy’s largest company pumps almost 250,000 barrels a day in Libya, or about 14 percent of its total production. Eni’s shares lost 0.9 percent today after falling 5.1 percent yesterday, the most in 19 months.

‘Dominoes Are Falling’

Qatar’s QE Index fell 3.6 percent, the most since May.

“The dominoes are falling in the Middle East, causing oil to spike and risky asset classes to stumble,” Fred Goodwin, a fixed-income strategist at Nomura International in London, wrote in a research note. “Higher oil is a very bad growth shock, as it smashes real incomes.”

The MSCI Emerging Markets Index lost 1.9 percent, its largest drop in almost two weeks. Indexes in Abu Dhabi, Dubai, Tunisia, South Africa, Taiwan and South Korea slid more than 1 percent. China’s Shanghai Composite Index declined 2.6 percent, the most in a month.

Stocks in developed countries are rising the most since 1998 while emerging markets slump, a sign the U.S. is returning to its role as the engine of world growth aided by a recovery in Europe. The MSCI World Index of equities in 24 countries rose 6.1 percent for 2011 through yesterday, the best annual start in 13 years, and the MSCI Emerging Markets Index of shares in nations such as Brazil, Russia, India and China lost 2.7 percent.

Franc Rallies

The franc advanced against all 16 major counterparts, appreciating 1.1 percent against the euro and 3.2 percent against the New Zealand dollar, as investors sought currencies considered the most safe.

The kiwi tumbled 2.2 percent against the U.S. dollar and sank 2.7 percent versus the yen. The magnitude 6.3 earthquake was the strongest since September when the city was shaken by a 7.0 temblor, New Zealand police said in a statement. Rescue workers in the New Zealand city of Christchurch will comb through collapsed ruins of office buildings today as they search for trapped survivors of the quake that killed at least 65 people, Deputy Prime Minister Bill English told reporters yesterday.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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