U.S. Stocks Rally as Consumer Shares Offset Oil, China Selloffs

Will the Oil Price Collapse Mute Earnings Gains?
  • Alcoa climbs after-hours as traders shift focus to earnings
  • Crude drives commodities rout as South african rand tumbles

U.S stocks rose in the last 30 minutes of trading, bringing to an end a volatile session as gains in consumer and technology shares overshadowed lingering concern over China that continued to fuel a rout in commodities. Treasuries retreated.

The Standard and Poor’s 500 Index ended Monday up 0.1 percent, after sliding to within two points of the 1,900 level earlier in the session, while the Dow Jones Industrial Average climbed for the first time in four days. The Russell 2000 Index of smaller companies declined to near bear market territory amid losses in biotechnology shares. The U.S. gains came after losses in Europe and Asia, as China’s Shanghai Composite Index slumped more than 5 percent. Risk aversion was still evident in currency markets, with South Africa’s rand tumbling to a record low as oil extended its slide and copper fell.

U.S. stocks had a wild ride during the Monday session.
U.S. stocks had a wild ride during the Monday session.

Strength in China’s yuan provided some relief for investors amid concern recent weakness in the Chinese currency would spark turmoil in the economies of its major trading partners. Stocks around the world still stumbled as selling in raw materials worsened, with the Bloomberg Commodity Index sliding back to its lowest level since 1999. Investors are eager to see whether the China-led global slowdown hurt profits last quarter, with Alcoa Inc. kicking off the reporting season after U.S. markets closed.

“January has certainly been worse than expected so far,” said Stephen Carl, principal and head equity trader at Williams Capital Group LP. “You have weak oil and the China overhang, plus some skepticism around how strong economic numbers will continue to be. We’re trying to find a trading pattern with no notable economic numbers this morning.”

Stocks

The S&P 500 closed at 1,923.67 as of 4 p.m. in New York, as consumer staples and discretionary stocks - as well as phone and technology companies - drove gains. Last week, the index capped record slide over five days to begin a year amid a worldwide selloff sparked by concern that China’s slowdown is worse than anticipated. Even data showing resilience in the U.S. labor market couldn’t halt losses for the benchmark on Friday.

Freeport-McMoRan Inc. sank 20 percent Monday to the lowest level in 15 years, while energy producers plunged 2.1 percent as a group. Health-care shares also retreated, with biotech firms leading losses.

U.S. aluminum producer Alcoa unofficially got the the U.S. reporting season under way just as markets closed, reporting better-than-expected fourth-quarter earnings amid resurgent demand for components made from the metal. Alcoa’s shares rose 2.5 percent in extended trading.

JPMorgan Chase & Co., Intel Corp. and Citigroup Inc. are among 11 companies scheduled to post their quarterly results this week. Analysts estimate profits for S&P 500 members fell 6.7 percent last quarter.

“Hopefully this week we will get a bit more stability and proper direction in the market,” said Patrick Spencer, equities vice chairman at Robert W. Baird & Co. in London. “A decent earnings season could easily spark a revival in the market, but any disappointment or warnings about the future will be punished.”

After a day of fluctuations, European stocks closed at their lowest levels since September. The Stoxx Europe 600 Index erased its gain in the final hour of trading, falling 0.3 percent as commodity producers reversed advances. The MSCI Asia Pacific excluding Japan Index slid 1.9 percent, with markets in Tokyo closed for a holiday.

Bonds

Ten-year Treasury notes snapped a five-day climb, with yields rising from their lowest level in more than two months, up six basis points to 2.17 percent Monday. Rates had dropped 19 basis points over the previous seven days and reached 2.11 percent earlier, the lowest level since Oct. 29.

“There is no reason” 10-year yields can’t drop below 2 percent later this month, Jabaz Mathai, a strategist at Citigroup Inc., wrote in a report dated Jan. 8. Investors have built up overweight positions in corporate debt and any forced selloff amid lower liquidity could weaken the sector and spur demand for Treasuries.

“With fundamentals changing slowly and risk appetite falling rapidly, the stage is set for a longer period of risk asset underperformance,” Mathai said. “There is no quick fix to the headwinds facing global growth.”

Currencies

The yen retreated after climbing every day last week, when an eight-day run of reductions to the yuan’s reference rate through Thursday sent shock waves through financial markets. The euro also declined Monday after China’s central bank kept the currency’s daily fixing stable for the second day in a row.

“There was a lot of people rushing around putting new positions on last week, so maybe the initial reaction has been done,” said Jane Foley, a foreign-exchange strategist at Rabobank International in London. “The yen is still very firm compared to where it was and euro-dollar will find it hard to push much lower when there is still this risk aversion. We’ve got another volatile year ahead.”

The yen touched 116.70 earlier in the day, its strongest level since Aug. 24, before reversing the gains. The euro fell 0.6 percent to $1.0856. High-yielding currencies with links to China rallied, with Australia’s dollar up 0.6 percent and New Zealand’s rising 0.2 percent.

Oil’s ongoing slump sent the Norwegian krone down 0.7 percent.

Emerging Markets

South Africa’s rand plunged more than 9 percent in early Monday trading, its steepest slide since October 2008. South Korea’s won fell 1 percent to the weakest level since 2010, while Russia’s ruble slid 1.9 percent.

Stocks in developing nations retreated to their lowest point in more than six years, with all 10 industries in the MSCI Emerging Markets Index declining. The gauge has fallen 8.9 percent in January, extending last year’s 17 percent slump that was the worst since 2011. Concern China’s slowdown will hurt demand for goods from countries such as South Korea to South Africa and Brazil is hobbling EM, given many count Asia’s largest economy among their major trading destinations.

The yuan snapped a three-day loss after the central bank kept the reference rate used to manage the currency little changed, bolstering speculation that last week’s bout of weaker fixings has halted for now. The onshore currency gained 0.4 percent and the yuan traded in Hong Kong advanced 1 percent.

Commodities

Oil futures in New York slid 5.3 percent to $31.41 a barrel, after earlier dropping as low as $30.88. Contracts on Brent crude tumbled 6.5 percent to $31.37 in London. A rapid appreciation of the U.S. dollar may send Brent to as low as $20 a barrel, according to analysts at Morgan Stanley.

Muted Chinese inflation data sent copper to a six-year low, while shares of BHP Billiton Ltd., the world’s largest mining company, reached its lowest level in a decade.

Gold retreated after posting its best week since August. The metal dropped 0.9 percent to $1,094.39 an ounce in the spot market, as demand for haven investments abated.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE