Stocks Tumble With Crude as China Concerns Roil Global Markets

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Uncertainty and Fear Dominate the Markets
  • S&P 500 extends slump into September, historically a bad month
  • Haven assets bid with yen rallying with gold, Treasuries

U.S. stocks led a renewed rout in equities worldwide as concern that China’s slowing economy will stymie global growth roiled financial markets.

The Standard & Poor’s 500 Index swooned into September with its third-biggest loss of 2015 as the beating that erased $5.7 trillion from the value of shares globally in August continued. Crude oil tumbled the most in two months, emerging assets plunged and a measure of the risk premium on high-yield debt jumped. Demand for haven assets surged from Treasuries to gold.

“September is the worst month of the year historically and that’s scaring people a little bit,” Peter Tuz, who helps manage more than $430 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia, said by phone. “The China PMI seemed to set it off but people are deciding this morning to take some money off the table, just sitting on cash for a while and that’s feeding on itself on top of a down day already.”

The S&P 500 was down 3 percent by 4 p.m. in New York after plunging 6.3 percent in August for its worst month since 2012. The gauge has fallen 1.1 percent on average in September going back to 1927, the most of any month according to data compiled by Bloomberg.

Chinese Factories

Asian shares started Tuesday’s selloff after a gauge of Chinese manufacturing fell to a three-year low. European stocks followed as a reports pointed to weaker growth in the region, and the slump spread to the U.S. amid data showing the slowest factory expansion in two years. Ten-year Treasury yields slipped seven basis points to 2.15 percent, and gold climbed a third day, while oil tumbled after entering a bull market. The yen strengthened the most among major currencies.

Trading in U.S. equities has been volatile. Last week alone, the S&P 500 plunged the most since 2011 to enter a correction before rallying more than 6 percent over two days for its best back-to-back gains since the beginning of the bull market in 2009. Selling resumed Monday after Federal Reserve officials signaled they are preparing to raise rates as soon as this month.

The Chicago Board Options Volatility Index jumped 11 percent Tuesday after posting its biggest monthly advance in data going back to 1990.

“The market is running around nervous, not sure what to pay attention to,” said Robert Pavlik, who helps oversee $9.1 billion as chief market strategist at Boston Private Wealth. “People are worried about China today but they’re going from one issue to the next issue. The market’s not necessarily trading on news. Everybody seems to be looking for an excuse.”

Fed Watch

Stocks in emerging markets also picked up where they left off in August, sliding 2.2 percent Tuesday. Slowing Chinese growth has repercussions for countries from Brazil to Russia and Australia, which rely on demand from the world’s second-largest economy for their exports. The prospect of a Fed rate increase this month is also weighing on sentiment toward equities.

The Fed is scrutinizing data to determine the timing and pace of its first boost to borrowing costs since 2006. Attention will focus this week on the government’s August jobs report, due Friday, as the last major data point before the Fed meets Sept. 16-17.

Boston Fed President Eric Rosengren said Tuesday that uncertainty over inflation and global growth justifies a modest pace of rate increases, regardless of when the central bank begins tightening policy.

Futures traders are betting the Fed will push back liftoff to later this year. Odds of an increase in September have fallen to 30 percent, down from 48 percent two weeks ago, according to data compiled by Bloomberg. The chances assume that the federal funds rate will average 0.375 percent after the first hike.

Declining Confidence

The International Monetary Fund on Tuesday joined private forecasters including Citigroup Inc. and Morgan Stanley in anticipating slower global expansion as China’s momentum falters and Brazil’s economy shrinks.

The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, jumped the most in a month. The gauge rises when investor confidence deteriorates.

The Stoxx Europe 600 Index lost 2.7 percent Tuesday, while the Shanghai Composite Index fell 1.2 percent and the Hang Seng China Enterprises Index, a measure tracking mainland Chinese stocks listed in Hong Kong, lost 3 percent.

Oil retreated as its biggest three-day rally in 25 years stalled before data forecast to show an increase in U.S. crude stockpiles. West Texas Intermediate crude dropped 7.7 percent to settle at $45.41 a barrel, while Brent slipped 8.5 percent to end the session at $49.56.

Energy analysts are predicting a 900,000-barrel increase in U.S. supplies in the report out Wednesday, with a gain of that size enough to keep inventories more than 90 million barrels above the five-year seasonal average. The American Petroleum Institute was said to report U.S. crude supplies rose by 7.6 million barrels last week, tweets showed.

Haven Demand

The yen appreciated 1.5 percent to 119.37 per dollar following a 2.2 percent gain in August, its biggest monthly advance since January 2014. The euro climbed 0.9 percent to $1.1315 as the Bloomberg Dollar Spot Index, a gauge of the U.S. currency against 10 major peers, declined 0.2 percent.

U.S. government debt rose alongside European bonds. Two-year Treasury yields fell for the first time in six days, dropping four basis points, or 0.04 percentage point, to 0.71 percent, while Germany’s benchmark 10-year bund rates slipped three basis points to 0.77 percent.

“The perceived risk surrounding China is driving demand for the safest assets,” said David Schnautz, a London-based fixed-income strategist at Commerzbank AG. “A September liftoff is a close call. The strength of the U.S. economy doesn’t warrant the current low rates, but other factors may be taken into consideration.”

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