Stocks Fall as Oil Drop Worsens; Euro Weakens to 2006 Low

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ECB President Mario Draghi
Mario Draghi, President of the European Central Bank, said in an interview with German newspaper Handelsblatt published last week that while deflation risks are “limited,” policy makers “have to act against such risk.” Photographer: Martin Leissl/Bloomberg

Stocks fell around the world as energy shares plunged and U.S. crude oil sank below $50 for the first time since April 2009. The euro weakened to an almost nine-year low, while Treasuries rose with gold on demand for haven assets.

The Standard & Poor’s 500 Index fell 1.8 percent by the 4 p.m. close, its biggest drop since Oct. 9. The Stoxx Europe 600 Index slid 2.2 percent, as a gauge of European energy stocks dropped the most in three years. West Texas Intermediate oil tumbled as much as 5.5 percent to $49.77 a barrel. The euro declined 0.5 percent to $1.1937, after touching its weakest level since March 2006. Yields on 10-year Treasuries fell eight basis points to 2.04 percent. Gold futures added 1.5 percent.

The S&P 500 capped its first four-day slump since December 2013 as a gauge of global stocks slid the most in almost a year. Record supplies from Iraq and Russia coupled with concern over slowing demand fueled oil’s declines, while concern over Greece intensified as Prime Minister Antonis Samaras said this month’s election could lead to the nation exiting the euro area. Data today showed German inflation slowed more than forecast, bolstering the case for European quantitative easing.

“This fear trade is being sparked by the deflationary concerns over in Europe,” said Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion. “Sprinkle that together with the fact that it looks as if oil prices are going to continue to see lower lows in the course of the next couple weeks, and it puts together a risk-off trading environment within the markets.”

Oil Stocks

The MSCI All-Country World Index plunged 1.9 percent, the most on a closing basis since Jan. 24 last year, as all but one of the 24 developed market gauges tracked by Bloomberg retreated. Australia’s S&P/ASX 200 Index added 0.3 percent, the only gainer.

All of the 10 main S&P 500 industry groups declined as the sub-index of energy companies plunged 4 percent. S&P 500 energy stocks fell 10 percent in 2014 for the worst performance among the groups. A gauge of oil and gas explorers and producers tumbled 5.9 percent, with all 18 members declining. Chevron Corp. lost 4 percent today, the most since November.

WTI crude settled 5 percent lower in New York, at $50.04 a barrel, the lowest close since April 28, 2009. Brent oil slid 5.9 percent to $53.11 per barrel in London, its lowest settlement since May 1, 2009, amid speculation a global glut that drove oil into a bear market will persist this year.

Iraqi Output

Iraq plans to expand crude exports to 3.3 million barrels a day this month, Oil Ministry spokesman Asim Jihad said by phone yesterday. The country exported 2.94 million a day in December, the most since the 1980s, he said. Russian oil production rose to a post-Soviet record of 10.67 million barrels a day in December, according to Energy Ministry data published Jan. 2.

Shares of Caterpillar Inc. slid 5.3 percent, the most since October 2013, to lead the Dow Jones Industrial Average down 1.9 percent. The company, already battered by a slump in demand for its mining machinery, faces slowing sales of compressors, pumps and gas turbines as oil companies reduce spending.

The S&P 500 fell 1.5 percent last week as traders sold shares that rose the most in 2014 and scrutinized growth prospects after a three-year rally that took benchmark indexes to records. Professional forecasters are calling for an 8.5 percent advance in the index this year.

Greek Assets

European stocks fell the most in three weeks as oil’s retreat and the speculation over Greece’s euro membership overshadowed the prospect of increased stimulus from the European Central Bank. Oil companies in the Stoxx 600 declined 4.9 percent, the most among 19 industry groups, as BP Plc and Total SA dropped at least 4.3 percent.

Greece’s ASE Index lost 5.6 percent for the biggest decline among 18 western-European stock gauges.

“The declines in oil are representing something much more ominous, which is a global economic slowdown,” Jeff Sica, president and CEO of advisory firm Circle Squared Alternative Investments, which oversees $1.5 billion, said by phone. “Investors have gone past the thought that this is good for the economy.”

The inflation rate in Germany, the euro region’s largest economy, fell to 0.1 percent in December from 0.5 percent in November, the Federal Statistics office in Wiesbaden said today. That’s the lowest level since October 2009.

Euro Pressure

ECB officials are debating whether to start large-scale buying of government bonds in an attempt to boost consumer prices in the euro area and stimulate the economy. President Mario Draghi, who is trying to counter arguments that bond purchases would see the central bank take on too much risk and reduce the incentive for economic reforms, has said the possibility of deflation can’t be excluded.

Adding to pressure on the euro is the prospect that the Federal Reserve will raise interest rates this year, boosting the allure of the dollar. Intercontinental Exchange Inc.’s Dollar Index, which measures the U.S. currency against major peers, rose to its strongest level since December 2005.

“It’s very hard to imagine something that can convince the market that the euro is not a selling opportunity at this juncture,” said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. “The market continues to speculate that the ECB will start QE this month. The election in Greece probably complicates the agenda for Draghi.”

Gross Commentary

Yields on Greece’s three-year notes rose 127 basis points, or 1.27 percentage point, to 13.21 percent. Rates touched 14.07 percent Jan. 2. The nation’s 10-year yields increased 41 basis points to 9.67 percent, having reached 9.85 percent Dec. 29. Italy’s 10-year rates climbed 10 basis points to 1.84 percent, having touched a record low of 1.737 percent Jan. 2.

Treasuries rose, pushing 30-year bond yields to the lowest level in more than two years. Rates slipped eight basis points to 2.61 percent, the least since Aug. 2, 2012.

Bill Gross, the former manager of the world’s largest bond fund, predicted the Fed won’t raise U.S. rates until late this year “if at all.”

While the U.S. central bank has concluded its three rounds of asset purchases interest rates in almost all developed economies will remain near zero as policy makers in Europe and Japan embark on similar projects, Gross said today in an outlook report published on the website of Janus Capital Group Inc.

‘Cautious Start’

Gold futures rose for a second trading day, climbing 1.5 percent to $1,204 an ounce. Silver futures jumped 2.8 percent.

The MSCI Emerging Markets Index dropped 1.4 percent today and a gauge of 20 developing-nation currencies fell for a second day, sliding 0.9 percent to a 12-year low. Brazil’s Ibovespa stock gauge slid 2.1 percent.

“It is a cautious start to the year,” said Neil Shearing, chief emerging-markets economist at London-based Capital Economics Ltd. “The signs that problems are building in Greece are adding to an already long list of things for emerging-market investors to worry about.”

Russia’s dollar-denominated RTS Index retreated 3.7 percent, while the ruble-based Micex index gained 2.8 percent. The Dubai Financial Market Index tumbled 3.4 percent, Saudi Arabia’s Tadawul All Share Index lost 3 percent and Qatar’s benchmark gauge declined 1.9 percent.

The Shanghai Composite Index advanced 3.6 percent to the highest close since August 2009 as investors bought shares of the largest companies and developers on the first trading day of 2015 in mainland China. The Hang Seng China Enterprises Index of slipped 0.3 percent after gaining 3.4 percent over the previous two trading days.

China’s benchmark money-market rate dropped by the most in almost two weeks today as cash returned to the financial system with the end of the holiday season.

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