U.S. Stocks Decline as Small-Caps Tumble With Commodities

China's Finance Minister Lou Jiwei
Lou Jiwei, China’s Finance Minister, said growth in Asia’s largest economy faces downward pressure. Photographer: Andrew Harrer/Bloomberg

U.S. stocks fell, led by small-cap shares, and commodities tumbled to a five-year low as China’s finance minister damped stimulus hopes and sales of existing homes in the U.S. unexpectedly dropped. Bonds advanced.

The Standard & Poor’s 500 Index had its biggest decline since Aug. 5, falling 0.8 percent at 4 p.m. in New York after reaching a record last week. The MSCI All-Country World Index lost 0.8 percent and the MSCI Emerging Markets Index tumbled 1.3 percent, the most since March. The Russell 2000 Index of smaller companies slid 1.5 percent, the biggest drop in seven weeks. The VIX jumped 13 percent for its biggest rally since July. The yield on 10-year Treasuries declined 1 basis point to 2.56 percent. Copper and Brent crude tumbled 1.7 percent.

Purchases of previously owned U.S. homes declined in August for the first time in five months. China’s Finance Minister Lou Jiwei said growth faces downward pressure and reiterated that there won’t be major changes in policy in response to individual economic indicators. Group of 20 officials said low interest rates could lead to a potential increase in financial-market risk, as major economies rely on monetary stimulus to bolster uneven growth.

“People are looking for an excuse to knock the market back down a little bit,” Donald Selkin, chief market strategist for New York-based National Securities Corp., which oversees about $3 billion, said in a phone interview. “The internals for the market are horrible today. Maybe the feeling is that we might finally be ready for a more serious down move.”

Small Caps

Shares tracked by the Russell 2000 slid 1.5 percent, bringing the decline since Sept. 18 to 2.6 percent, the largest retreat since Aug. 1. The Russell 3000 Index lost 1 percent.

While the Russell 3000 touched an intraday record at the end of last week, fewer than 55 percent of its components traded above their 200-day moving average. The last time so few companies in the index helped push the gauge to an intraday high was the peak of the dot-com bubble in March 2000, according to MKM Partners LLC.

“Small caps are really under-performing again and I think that’s the main issue here,” JC O’Hara, the New York-based chief market technician at FBN Securities Inc, said by phone. “We’re seeing the spread between the Russell and the S&P 500 widening out again and that is worrying some people. Traders want to see small caps participate and every time they don’t they think, ‘it’s still not working.’”

Alibaba Group Holding Ltd. slumped 4.3 percent in New York, after soaring 38 percent in its trading debut last week. Yahoo! Inc. dropped 5.6 percent after Sanford C. Bernstein & Co. lowered its rating on the Web-portal company. Sigma-Aldrich Corp. jumped 33 percent after Germany’s Merck KGaA agreed to buy the specialty-chemicals company for $17 billion.

Home Sales

An S&P index of homebuilders lost 2.6 percent as the National Association of Realtors said existing home sales dropped 1.8 percent to a 5.05 million annual pace, from a revised 5.14 million pace in July. The median forecast of 72 economists in a Bloomberg survey called for 5.2 million.

The Chicago Board Options Exchange Volatility Index, the gauge known as the VIX, increased 13 percent to 13.69. The gauge lost 29 percent last month, the biggest drop in almost three years.

The S&P 500 hasn’t had a four-day slide this year and hasn’t fallen 10 percent in three years.

Fed Commitment

The benchmark gauge rose 1.3 percent last week, reaching a record on Sept. 18, as economic data improved and the Federal Reserve maintained a commitment to keep interest rates near zero for a “considerable time” after asset purchases are completed in October. Central bank officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June.

Treasuries gained for a third day, the longest rally this month, after Fed Bank of New York President William C. Dudley argued for “patience” on interest-rate increases, while billionaire Julian Robertson said there’s a bubble in bonds that will end “in a very bad way.”

The Fed is on the lookout for signs of asset-price bubbles, and financial stability is a necessary condition for effective monetary policy, Dudley said at the Bloomberg Markets Most Influential Summit in New York.

“I think we do need to try to identify asset bubbles in real time,” he said. “You can’t have an effective monetary policy if you have financial instability.”

‘Ridiculous Levels’

“Bonds are at ridiculous levels,” Robertson, the founder of Tiger Management LLC, said at the summit. “It’s a worldwide phenomenon that governments are buying bonds to keep their countries moving along economically.”

G-20 officials said yesterday in a communique released in Cairns, Australia, that they “are mindful of the potential for a build-up of excessive risk in financial markets, particularly in an environment of low interest rates and low asset price volatility.” The ministers welcomed signs of strength in some key economies while noting “growth in the global economy is uneven.”

The European Central Bank will actively manage its balance sheet and is willing to implement more stimulus if required to stave off the threat of deflation in the euro area, ECB President Mario Draghi said in his quarterly testimony to European lawmakers in Brussels today.

Bond Yields

Yields on 10-year U.S. Treasuries fell 1 point to 2.56 percent after dropping four basis points last week.

Gains in French government bonds sent the 10-year yield 4 basis points lower to 1.35 percent, while the rate on similar-maturity Belgian debt fell 4 basis points to 1.29 percent. The rate on Japanese notes declined 2 basis points to 0.54 percent.

The Stoxx Europe 600 Index declined 0.5 percent, the most this month, after closing last week 0.3 percent away from a six-year high reached in June. Commodities producers fell the most among 19 industry groups.

The Bloomberg Commodity Index dropped 0.7 percent to the lowest level since July 2009 on speculation demand will drop amid slower growth in China. Copper retreated 1.7 percent and nickel tumbled 4.2 percent to a five-month low. Brent crude fell 1.7 percent to $96.71 a barrel.

Commodities are 12 percent lower this quarter, heading for the biggest such loss since the financial crisis in 2008. China is the largest consumer of energy and buyer of industrial metals.

Emerging Markets

South Africa’s rand dropped 0.7 percent to the weakest level against the dollar since February. Australia’s dollar lost 0.5 percent to 88.78 U.S. cents, also the weakest in seven months. Brazil’s real slumped 1 percent.

The euro rose 0.2 percent to $1.2851. The U.S. currency declined 0.3 percent to 108.77 yen, and the euro slipped 0.1 percent to 139.77 yen.

The MSCI Emerging Markets Index slid 1.3 percent to the lowest level since June. The MSCI AC Asia Pacific Index fell 0.8 percent, also to its lowest close since June. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong fell 1.7 percent to a two-month low.

China’s economy is growing in a stable way and operating within a reasonable range, Finance Minister Lou said in a statement published on the People’s Bank of China website. Macroeconomic policy will focus on “comprehensive” targets, particularly job growth and price stability, according to the statement.

His comments quelled speculation that weaker economic data will spur further stimulus in the world’s second-biggest economy. A private gauge of Chinese manufacturing probably dropped for a second month in September, economists in a Bloomberg survey said before a report tomorrow. Data last week showed foreign direct investments decreased to a four-year low and home prices fell in all but two cities tracked by authorities.

Settling Down

“It looks like the Chinese government recognizes that the economic boom is over,” said Andrea Williams, who helps oversee 50 billion pounds ($82 billion) of investments as head of European equities at Royal London Asset Management Ltd. in London. “The country is settling down to a lower level of growth.”

Russia’s Micex slid 1.3 percent, falling for a fourth day to give the index the longest run of losses since July after the arrest of AFK Sistema’s billionaire owner Vladimir Evtushenkov. The case against Evtushenkov stems from a probe into OAO Bashneft, an oil producer that his holding company Sistema acquired in 2009, the Investigative Committee said on Sept. 16. Sistema dropped 3.4 percent and Bashneft retreated 5.2 percent.

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