Biotech Rout Halts U.S. Stock Rally; Oil Gains as Dollar Weakens

  • Nasdaq leads losses as drugmakers hit; energy shares rebound
  • Emerging assets extend advance as U.S. rate-hike bets slip

A rout in biotechnology shares snapped the longest rally in U.S. stocks this year, while the weakening dollar helped emerging-market equities to their highest level since August. Oil drove a surge in commodities.

The Standard & Poor’s 500 Index retreated after gaining 5.6 percent in five days, as concern over drug pricing and company earnings rekindled the biotech selloff. Energy producers capped their biggest six-day rally in the history of the bull market as crude surged to a one-month high. The Bloomberg Dollar Spot Index dropped a fourth day, while equities in developing nations extended the longest run of gains since April.

As prospects of a 2015 Fed hike fade, so does the greenback
As prospects of a 2015 Fed hike fade, so does the greenback

“This is one of those short term reversals where investors are stepping in and looking for some opportunity on a pullback,” said Greg Woodard, a senior analyst and strategist at Fairport, New York-based Manning & Napier Inc., which oversees about $46 billion. “Bottoms tend to be more of a process than an event. You have a lot of macro growth concerns and concerns about earnings coming up. We’re in store for certainly some volatility in the equity markets.”

The U.S. stock rally faltered amid an attempt by the S&P 500 to rebound from its first correction in four years. With economic data sparse after last week’s disappointing U.S. jobs report, investors are switching focus to third-quarter earnings season, which starts this week. Speculation the Federal Reserve will keep key rates near zero has torpedoed the greenback, sparking a rally in commodities that have been beaten down since August. 

Stocks

The S&P 500 fell 0.4 percent to 1,979.92 by 4 p.m. in New York. The index surged toward 2,000 points Monday, where previous advances from its Aug. 25 low had ended. The Dow Jones Industrial Average rose 0.1 percent as DuPont Co. jumped 7.7 percent after replacing its chief executive officer.

Biotechnology stocks in the S&P 500 slid 2.3 percent on Tuesday, leading the Nasdaq Composite Index to a loss of 0.7 percent. Illumina Inc. shares fell 11 percent after the company forecast fourth-quarter sales below analysts’ estimates. Vertex Pharmaceuticals Inc. sank 6.6 percent for the biggest drop in the S&P 500.

Shares of energy, raw-material and industrial companies had led the recent rally amid speculation the weaker U.S. currency will lift profits for multinationals, which benefit when their overseas earnings are converted back to dollars. The S&P 500 Energy Index rose a sixth day, bringing its advance to 12 percent over the period, the most since January 2009.

Yum! Brands Inc. slid as much as 19 percent in after-hours trading as slumping sales in China caused the owner of the KFC, Pizza Hut and Taco Bell chains to cut its profit forecast and report third-quarter earnings that were below analysts’ estimates. The company’s China division accounted for more than 50 percent of revenue last year.

Alcoa Inc. will unofficially kick off the earnings season after the markets close on Oct. 8. Analysts project income for S&P 500 members dropped 6.9 percent in the third quarter.

Commodities

The Bloomberg Commodity Index jumped 1.7 percent to its highest level since Aug. 31. Oil rose above $48 a barrel in third day of gains, with West Texas Intermediate crude jumping 4.9 percent to settle at 48.53 a barrel. Brent rose 5.4 percent to $51.92, its highest close since August.

U.S. crude production dropped by 120,000 barrels a day in September from the prior month, according to the U.S. Energy Department’s monthly Short-Term Energy Outlook, while stockpiles remain about 100 million barrels above the five-year average.

U.S. oil inventories help shape perceptions of the global glut
U.S. oil inventories help shape perceptions of the global glut

Gold climbed 1 percent to $1,147.24 an ounce, the highest settlement in a week, with bets on the Federal Reserve raising borrowing costs this year decline. Platinum jumped and copper rose 0.2 percent to settle at $5,185 a metric ton in London in a third day of gains.

Cattle, hogs, wheat and gas oil all climbed at least 2 percent Tuesday, while aluminum and zinc were the only decliners with sugar.

Bonds

Treasuries climbed, with yields on benchmark 10-year notes slipping two basis points, or 0.02 percentage point, to at 2.03 percent after gaining six basis points on Monday.

Futures traders have been trimming bets the Fed will boost rates this year even as officials including Chair Janet Yellen and New York Fed President William C. Dudley say that they expect to act in 2015. Goldman Sachs Group Inc. says there’s a chance the Fed will delay its planned rate increase well into 2016, or even later.

Odds of a hike in October are at 10 percent, while bets on an increase in December, the last meeting of the year, have dropped to 35.2 percent, from 57.5 percent a month ago.

Currencies

Bloomberg’s dollar gaugefell 0.6 percent for a fourth straight daily decline. The Brazilian real and Norwegian krone strengthened the most versus the greenback amid the gains in commodities.

Australia’s dollar climbed 1.2 percent to 71.66 U.S. cents, after touching 71.57, the strongest level since Sept. 22, after the country’s central bank chief left rates at a record low Tuesday. The euro added 0.8 percent to $1.1272, while the U.S currency slipped 0.2 percent to 120.23 yen.

Japan’s central bank began a two-day policy meeting on Tuesday, with two of 36 economists surveyed by Bloomberg expecting the central bank to expand monetary stimulus in a statement due Wednesday. Almost half predict more easing when the bank meets later this month.

Emerging Markets

The MSCI Emerging Markets Index rose 0.9 percent, advancing for a fifth day. The International Monetary Fund cited a slowdown in developing economies in cutting its outlook for global growth Tuesday, and Anshu Jain, former head of Deutsche Bank AG, said some emerging markets remain a worry.

The recent selloff in developing-market assets, including Mexico’s peso and Malaysia’s ringgit, has opened up investment opportunities not seen for decades, according to Franklin Templeton’s Michael Hasenstab, who’s well known for making contrarian bets. A gauge of emerging market currencies climbed 0.8 percent to the highest level since Aug. 31.

The Hang Seng China Enterprises Index in Hong Kong advanced 0.5 percent, its fourth trading day of gains and longest rally since April. Markets in mainland China are set to resume on Thursday after a week-long National Day holiday. 

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