European Stocks Climb With U.S. Futures, Oil as Treasuries Drop

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El-Erian: Today's Late-Day Selloff Is Worrisome
  • S&P 500 erases 2.9% gain, yen pares loss as swings accelerate
  • China rate-cut optimism cedes to apprehension in final hours

Volatility continued to jolt financial markets after a rebound that took the Standard & Poor’s 500 Index up 2.9 percent melted away in the final hours of trading. The dollar pared gains while Treasuries trimmed losses.

The S&P 500 Index ended Tuesday down 1.4 percent as traders said trepidation over how China’s market will react to policy easing made holding on to stocks too risky for most investors. Before the rally disappeared, it appeared the appetite for risk in markets was returning following a selloff that erased $2.7 trillion from the value of global equities in a few days.

Equities had climbed earlier in the day, with the Dow Jones Industrial Average regaining more than 440 points as China’s central bank cut its benchmark lending rate for the fifth time since November and lowered the amount of cash banks must set aside in reserves. Commodities rallied, with oil rebounding from a six-year low, while the yen and euro retreated.

“We just saw a crazy evaporation of gains after being up the majority of the day,” said Stephen Carl, principal and head equity trader at Williams Capital Group LP. “People are nervous about the potential volatility that could erupt or resurface in the market. They’re not sure what’s going to happen overseas, and that uncertainty is winning out.”

China’s unexpected devaluation of the yuan on Aug. 11 sparked the biggest rout in U.S. stocks in nearly four years on concern that the slowdown in the world’s second-largest economy is worse than anticipated. A pull back in Chinese equities torpedoed emerging-market assets and sank commodities from oil to metals. Also looming over the markets is the Federal Reserve, which is contemplating the first increase in interest rates since 2006.

The Dow slid 1.3 percent to 15,666.44 by 4 p.m. in New York, down 4 percent from its highest point. The peak-to-trough retreat exceeded Monday’s loss. The S&P 500 closed at 1,867.61.

“There’s still some technical damage that needs to be corrected,” said Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co. “There’s still some selling that needs to take place. We’re not just going to slingshot back up.”

More than $2 trillion has been erased from American equity values since last Wednesday, breaking a calm in a stock market that before this week had gone almost four years without a 10 percent loss. After a day of wild swings, the S&P 500 lost 3.9 percent Monday. That capped a 7 percent two-day retreat, the most since December 2008, sending the index into its first correction since 2011.

Volatility Index

A gauge of options prices on U.S. equities dropped 9.1 percent today, paring an earlier drop of 31 percent. The Chicago Board Options Exchange Volatility Index, or VIX, retreated 12 percent after surging as much as 90 percent finishing to its highest level since October 2011 on Monday.

Other markets rallied in the wake of China’s policy moves, with European shares clawing back most of their biggest decline since the 2008 financial crisis. The Stoxx Europe 600 Index jumped 4.2 percent, the most since 2011, as German equities rallied after entering a bear market and the U.K.’s FTSE 100 Index climbed from its lowest level since 2012.

The MSCI Emerging Markets Index climbed 2.2 percent after closing Monday at the lowest since July 2009, with benchmarks from Taiwan to Turkey and South Africa advancing at least 3 percent.

Half of the 30 largest equity markets in developing economies have fallen 20 percent or more from their peaks, surpassing the threshold for a bear market. China and Russia have led the pack, tumbling more than 30 percent each. The remainder are either in a correction, or on the brink of one.

Hold Off

Mark Mobius says investors should hold off from buying developing-nation shares as the rebound will be short-lived amid widening price swings.

“We have a little bit to go before we see stabilization, but volatility will remain,” Mobius, chairman of the emerging-markets group at Franklin Templeton Investments, said in an interview with Bloomberg TV. “We are sitting on cash.”

The dollar pared back some of its advance as U.S. stocks erased their advances. Some of its biggest gains came against the Swiss franc, the euro and the yen -- all currencies that investors consider havens in times of market turmoil. The dollar ended the Tuesday session up 0.4 percent to 118.83 yen, after earlier rallying as much as 1.7 percent.

Tepid demand at a U.S. bond auction helped Treasuries to their first decline in a week, with yields on 10-year debt up seven basis points, or 0.07 percentage point, to 2.07 percent. The notes pared declines as stocks retreated, with the gyrations in equity markets the past week stoking a flight into government debt.

The Bloomberg Commodity Index rose 0.5 percent from a 16-year low as copper climbed 2.3 percent from a six-year low. Gold futures slid for a second day in New York as the early gains in equities hurt demand for haven assets.

West Texas Intermediate crude added 2.8 percent to $39.31 a barrel and Brent futures advanced 1.2 percent to $43.21. The oil market is healthier than Monday’s drop to six-year lows suggests, according to banks including Morgan Stanley and Standard Chartered Plc.

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