U.S. Stocks Tumble in Global Selloff on Bets Fed Lifeline to End

Should Investors Be Concerned Over a Strong U.S. Dollar?
  • S&P 500 Index drops most in a month following equity rally
  • Bets on December rate increase from Fed hover at 68%

The increased prospect that six years of near-zero U.S. borrowing costs may soon be brought to an end rippled through global markets, as companies hurt most by the stronger dollar led a selloff in American equities and bonds fell with emerging-market assets.

The Standard & Poor’s 500 Index sank the most in more than a month, with large companies from Caterpillar Inc. to Nike Inc. driving losses. A gauge of stocks worldwide sank the most in three weeks. The dollar wax near its highest level in a decade following a four-day rally, as a gauge of emerging-market currencies slumped to a five-week low. Yields on 10-year Treasuries climbed a sixth straight day, while oil retreated.

Investors globally continue to adjust to the increased likelihood America’s benchmark rate will be boosted this year, a move that would end an unprecedented era of record-low borrowing costs. Concern that capital outflows from developing nations will intensify sent emerging-market assets lower, while resources priced in dollars slumped with shares of U.S. multinational companies. Treasuries pared losses with gold demand for haven assets.

Investors shrugged off the threat of higher rates on Friday, focusing instead on a blowout jobs report that signaled the U.S. economy may be ready to withstand tighter monetary policy. That sentiment was reversed on Monday in the absence of any additional data and after American equities ended last week near their highest level in three months.

“People sort-of stewed on it over the weekend that we’re facing a rate hike in December,” said Robert Pavlik, who helps oversee $9.1 billion as chief market strategist at Boston Private Wealth. “I don’t think it’s the 25 basis points that’s necessarily leading the market down, but what comes after. How fast and furious do the rate hikes come now that this cheap money environment is coming to an end?”

Stocks

The S&P 500 fell 1 percent to 2,078.58 by 4 p.m. in New York, its steepest one-day drop since Oct. 2. The gauge is coming off its longest run of weekly gains this year, a streak that pushed it within 1.5 percent of its May record.

Consumer-discretionary stocks posted the second-biggest declines among 10 groups in the S&P 500, falling 1.3 percent. Macy’s Inc. and Kohl’s Corp. declined more than 5 percent after Citigroup Inc. cut earnings projections for the companies, saying the industry is suffering from a slowdown in sales and an inventory glut.

There is an “absence of any real, compelling reason to step in and buy a lot right now,” Peter Tuz, who helps manage $400 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia. “I don’t think anyone came into work today figuring that they had to load up on stocks.”

European stocks also fell, after rising four times in the past five sessions, as investors weighed the outlook for global economic growth and monetary stimulus. The Stoxx Europe 600 Index lost 1.1 percent as shares of exporters fell after worse-than-forecast Chinese trade data.

Bonds

Ten-year Treasury yields rose by two basis points, or 0.02 percentage point, to 2.35 percent, extending an increase that has pushed the rate to a three-month high.

High-yield borrowers continue to return to the market, as HCA Holdings Inc. plans to sell $1 billion in debt. U.S. corporate bonds fell last week, losing 0.743 percent, following the first month of gains for the securities since July, according to Bank of America Merrill Lynch Indexes.

Declines by Portugal’s sovereign bonds Monday pushed the 10-year yield to the highest level since July as a loose alliance of opposition parties was poised to topple Prime Minister Pedro Passos Coelho’s new government.

German 10-year bund yields dropped three basis points to 0.67 percent. The yield on similar-maturity Spanish bonds increased six basis points to 1.98 percent. Reuters reported that four ECB policy makers said a consensus is forming around cutting the deposit rate in December.

Currencies

The euro traded near its weakest level since April amid speculation the European Central Bank will deploy further currency-depreciating stimulus next month even as the U.S. moves to raise rates.

The euro traded at $1.0754, after falling to $1.0707 on Nov. 6, its weakest level on a closing basis since since April 22. The common currency was little changed at 132.44 yen.

Bloomberg’s Dollar Spot Index slipped 0.1 percent, after surging 1.9 percent last week to its highest level since the data started being collated at the end of 2004. The Korean won slid 1.3 percent to its weakest level in a month.

Odds on the Fed raising rates at its last meeting of 2015 have jumped to 68 percent, from 50 percent a week ago and 39 percent last month.

Emerging Markets

The Bloomberg gauge of developing-nation currencies retreated for a fourth day. Brazil’s real ended a two-day gain as economists in a Brazilian central bank survey said the country’s recession is worsening. Malaysia’s ringgit, the Thai baht and the Indian rupee each retreated at least 1 percent against the dollar.

“Capital flows to emerging markets should continue to be negative as U.S. interest rates move higher,” said Maarten-Jan Bakkum, a senior emerging-markets strategist at NN Investment Partners in The Hague. “Risk-reward in emerging markets is much less attractive due to the weak growth environment and more yield can be found in U.S. bonds.”

Mounting bets on a 2015 rate rise from the Fed have hit EM equities while fueling gains in the greenback.
Mounting bets on a 2015 rate rise from the Fed have hit EM equities while fueling gains in the greenback.

The MSCI Emerging Markets Index fell to the lowest level in a month, sliding 1 percent. 

The Shanghai Composite Index extended its bull market surge, climbing 1.6 percent in a fourth straight day of gains as a government plan to resume initial public offerings by the end of the year boosted brokerages.

Commodities

The Bloomberg Commodity Index, a measure of returns for 22 raw materials, fell 1.2 percent, extending its lowest level since 1999 as the stronger dollar crimped demand for resources denominated in the U.S. currency. 

Nickel fell for a fifth day to the lowest level in more than two months after trade data showed weaker demand in China, the biggest consumer of base metals. Gold futures were little changed at $1,088.10 an ounce after sliding to a three-month low on Friday.

West Texas Intermediate crude for December delivery slipped for a fourth day, falling 1 percent to $43.87 a barrel in New York amid ongoing concerns over a global supply glut.

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