Stock Rally Stalls as Dollar Slides on Central Bank Speculation

Stocks Rally, but Fed Looks to ECB, PBOC Moves
  • Fed, Bank of Japan meet later this week after China eases
  • S&P 500, Stoxx 600 retreat after multi-week advances

The four-week rally in global stocks stalled, while Treasuries rose and the dollar fell as central bank statements from Europe to China highlighted threats to global growth.

The Standard & Poor’s 500 Index retreated from a two-month high, with energy shares leading declines as oil slumped past $44 a barrel in New York. The Stoxx Europe 600 Index fell after three weeks of gains. The Bloomberg Dollar Spot Index lost 0.3 percent, while 10-year Treasuries halted two days of declines. Natural gas in the U.S. plunged to the lowest since April 2012.

Easing monetary policy in Europe and China last week boosted an October equities rally that has added about $5 trillion in value and helped the S&P 500 erase its loss for the year. It also sent Treasury yields to the highest in two weeks and gave the dollar its longest rally in 10 months. Those trades unwound on Monday, as investors refocused on the underlying reasons for the moves: persistent weakness in global economic growth.

“After last week’s big rally, the market is taking a breather and assessing the outlook for monetary policy on the back of Draghi’s speech and more easing in China,” said Alessandro Bee, a strategist at Bank J Safra Sarasin Ltd. in Zurich. “Central banks will be in focus again with the Fed meeting this week. It will be interesting to see if their outlook on the economy has changed.”

Investors will have to wait until Wednesday for the Federal Reserve’s policy update, while the Bank of Japan meets Friday. Central banks reasserted their dominance over financial markets last week as China cut its lending rate and European officials signaled a willingness to add to stimulus in an effort to combat flagging growth.

Stocks

The S&P 500 fell 0.2 percent at 4 p.m. in New York, after capping a fourth week of gains. The index is on track for its best month since 2011 after surging 11 percent from its August low. Energy shares led losses Monday with a 2.5 percent plunge.

Apple fell 3.2 percent after its best weekly rally in a year. Dialog Semiconductor Plc, which counts Apple as its biggest customer, tumbled 19 percent in Europe after posting quarterly revenue that missed projections. Skyworks Solutions Inc., another Apple supplier, sank 5.6 percent. Apple reports results after markets close Tuesday.

“There are some pretty big earnings this week,” Thomas Garcia, head of equity trading at Thornburg Investment Management Inc. in Santa Fe, New Mexico, said by phone. “I don’t think anyone in the world expects the Fed to raise rates in October but they’ll probably give more hints about what they’re thinking for the immediate future.”

Valeant Pharmaceuticals International Inc. lost 5.2 percent. The company brought back G. Mason Morfit, president of ValueAct Capital, to its board and held a conference call to strike back at critics of the company’s accounting and financial disclosures,

The Stoxx 600 fell 0.5 percent. Europe’s benchmark gauge rallied the most since July in the final two days of last week after President Mario Draghi hinted that the European Central Bank may add to stimulus measures.

Bonds

Benchmark 10-year Treasuries yields fell three basis points to 2.05 percent, according to Bloomberg Bond Trader data. The yield reached 2.10 percent on Oct. 23, a two-week high. German 10-year yields dropped two basis points to 0.50 percent.

“We’re facing a global economy with a slower growth profile, we’re seeing concerns about earnings, all of which suggests that the Fed will continue delaying the liftoff,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “That’s generally considered supportive for the Treasury market.”

Currencies

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, slipped. The measure rose for a seventh day Friday to the highest level this month. The dollar is benefiting from policy divergence as central banks outside the U.S. struggle to bolster growth.

“Fear of the Fed will take some of the shine off the dollar this week,” said Neil Jones, the London-based head of hedge-fund sales at Mizuho Bank Ltd. “The focus will shift away from ECB and the PBOC to the Fed this week.” U.S. data “may disappoint to the downside,” which would further act as a drag on the currency, he said.

The yen added 0.4 percent to 120.992 on Monday. Japan’s currency fell 0.6 percent, the most since Sept. 2, on Friday to cap its biggest weekly drop since May 29.

Commodities

Oil traded near the lowest closing price in almost four weeks, with West Texas Intermediate dropping 1.5 percent to $43.92 a barrel. Oil is failing to sustain a rally earlier this month above $50 a barrel as surging U.S. inventories bolstered speculation that a global glut will be prolonged.

Natural gas futures fell to the lowest since April 2012 as traders reacted to near-record inventories and mild weather that’s pushing back the start of winter demand for the heating fuel. The commodity for November delivery fell 9.8 percent to settle at $2.062 per million British thermal units on the New York Mercantile Exchange.

Gold halted a three-day drop. Investors are tracking the Fed to see when borrowing costs will start to rise for the first time since 2006, with policy makers beginning a two-day meeting in Washington on Tuesday. Futures rose 0.3 percent to settle at $1,166.20 an ounce in New York.

Emerging Markets

The MSCI Emerging Markets Index slipped 0.1 percent for a fourth loss in five days. The index has still advanced 9.6 percent in October, on track for the biggest monthly gain since January 2012, as investors speculated the Fed will postpone an interest-rate increase until March.

Argentine assets rallied after Mauricio Macri’s surprisingly strong showing in the first round of the presidential election fueled optimism the next government will unwind interventionist policies and bring the country back to international bond markets. Brazil’s real declined as concern that the nation’s fiscal picture is worsening outweighed investors’ optimism over emerging markets.

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