U.S. Stocks Slump as Oil Resuming Rout Fuels Debt, Gold Demand

Deep Dive: Another Leg Down for Oil?
  • S&P 500's losses accelerated in last hour of U.S. trading
  • Oil selloff below $31 revives risk aversion; ruble tumbles

U.S. stocks halted a two-day rebound, with losses piling up in the last hour of trading as crude oil resumed a selloff that has rocked financial markets this year. Commodity-linked currencies slid as investors sought refuge in haven assets from gold to Treasuries.

Energy and mining shares pushed the Standard & Poor’s 500 Index’s retreat to 1.6 percent as U.S. crude tumbled back below $31 a barrel, winding back a sizable chunk of Friday’s gains. Sentiment was better in emerging markets, where stocks headed for their steepest two-day advance since September on bets central banks will bolster stimulus to soothe the market turbulence. While the ruble weakened against all but one of its 31 major peers and Canada’s dollar sank, gold jumped. 10-year Treasury yields dropped five basis points.

MSCI All-Country World Index vs WTI Crude
MSCI All-Country World Index vs WTI Crude

Even after it staged a recovery late last week, crude is still nearing a 20 percent decline this year as brimming U.S. stockpiles and the prospect of additional Iranian exports fuel anxiety over a global glut. The slump in energy prices has also amplified concern over world growth and disinflation, as it also points to weaker industrial demand. With energy and commodity companies sliding, a measure of the correlation between global stocks and oil prices over the past 120 days has climbed to 0.5, the highest level since 2013.

“Obviously investors are working through some potentially difficult issues in their minds about the state of the world economy,” said John Carey, a Boston-based fund manager at Pioneer Investment Management Inc., which oversees about $230 billion. “It might might be a while before we emerge from this period of uncertainty. I’ve noticed that pattern of end-of-day volatility and wonder if there are programs that kick in at the end of the day that contribute to that.”

Stocks

The S&P 500 fell to 1,877.07 as of 4 p.m. in New York, following a 2 percent rebound on Friday. Equities are on track for their worst January since 2009 amid concern China’s slowdown will weigh on global growth, with plunging oil prices exacerbating that angst. The U.S. benchmark sank to a 21-month low last week before rallying.

Halliburton Co. declined 3 percent Monday after posting a quarterly loss, and Exxon Mobil Corp. slid amid the gyrations in crude oil. McDonald’s Corp. gained after the fast-food giant’s earnings beat analysts’ forecasts, while Tyco International Plc surged 12 percent after Johnson Controls Inc. agreed to merge with the company.

In Europe, the Stoxx 600 Index fell 0.6 percent after surging 5 percent over the previous two sessions. Seadrill Ltd. led the decline, tumbling 8.9 percent after the world’s biggest crude exporter said it’s keeping up investments in energy projects despite oil’s slump. A gauge of mining companies also dropped, while banks slid the most among industry groups.

“It’s the same old stuff today, the market’s being driven mostly by oil,” said David Donabedian, chief investment officer of Atlantic Trust Private Wealth Management, which oversees about $27 billion. “I don’t think that relationship is justified. I’m not as convinced that it’s a great indication of where the global economy is headed and therefore where the stock market is headed, but obviously a lot of the investment universe disagrees.”

In Asia, equities rose, with Japanese and Australian shares driving the MSCI Asia Pacific Index up 1.1 percent in a second day of gains. The Topix index added 1.3 percent in Tokyo, even as the yen strengthened. Hong Kong’s Hang Seng Index gained 1.4 percent.

Commodities

After extending gains earlier in the session, the retreat in West Texas Intermediate crude really got going during the European day, with futures falling 5.8 percent to $30.34 a barrel by the close of trading in New York. Brent crude lost 5.2 percent to $30.50 in London, after jumping 10 percent on Friday.

Saudi Arabian Oil Co. is maintaining investment in oil and natural gas projects as it studies options to sell shares in its parent company and refining and chemical operations, Chairman Khalid Al-Falih said Monday. The state-run producer, known as Saudi Aramco, can survive low oil prices for “a long, long time,” he told reporters in Riyadh, fueling concern that the global oil glut will persist.

Gold advanced as investors zeroed in on the precious metal’s attractiveness as a haven investment. Bullion for immediate delivery rose 1 percent to $1,108.80 an ounce, according to Bloomberg generic pricing. Gold climbed 0.8 percent last week as the turmoil in global stock markets renewed interest in the metal as a store of value.

Copper in London fell 0.6 percent to $4,417 a metric ton, while nickel dropped 1.7 percent to $8,550 a ton. The London Metals Exchange’s metals gauge fell 0.6 percent, while the Bloomberg Commodity Index slipped 1 percent after rallying last week.

Currencies

The euro rose for the first time in four days as the revival of risk aversion renewed bids for low-yielding, haven currencies. The shared currency climbed with the yen and the Swiss franc as investors unwound overseas bets funded in those currencies and channeled cash into government bonds.

Traders are jittery ahead of central bank meetings in the U.S., Japan and New Zealand this week, with speculation mounting policy makers will have to address the volatile start to 2016 trading and its impact on the world economy. The prospect of another interest-rate cut from the Reserve Bank of New Zealand before the end of June has weighed on the local dollar, which dropped 0.7 percent on Monday.

Japan’s currency has gained versus all of its 16 major counterparts this year as a China-led stock selloff and the tumble in oil prices bolstered the currency’s appeal. Hedge funds and other large speculators raised net bullish yen positions to the highest level in almost four years last week. The BOJ is scheduled to make a statement on monetary policy Jan. 29.

The Loonie and Mexico’s peso declined with the ruble as currencies of commodity-producing nations fell with crude. Australia’s dollar weakened 0.7 percent.

Bonds

U.S. Treasuries rose for the first time in three days, with the 10-year yield slipping to 2.01 percent. Thirty-year bond yields declined three basis points to 2.80 percent.

While the Fed’s Open Market Committee is set to review rates Jan. 27, traders aren’t pricing in the probability of the next increase until September. Futures prices indicate U.S. rates will rise to 0.62 percent by the end of this year, which implies about one increase in 2016.

The yield on 10-year German bunds fell one basis point, or 0.01 percentage point, to 0.47 percent, and rates on similar maturity Japanese notes were down the same amount to 0.23 percent.

“We saw a pretty simultaneous slump in oil and equity futures,” said John Davies, an interest-rate strategist at Standard Chartered in London. “U.S. Treasury yields took the cue accordingly and the curve has bull flattened in response,” he said referring to longer-dated bond yields falling faster than those on shorter-maturity debt.

Emerging Markets

The MSCI Emerging Markets Index rose 0.8 percent to bring its two-day climb to 4 percent. Benchmarks in Taiwan, Indonesia and the Philippines gained more than 1 percent while shares in the Gulf fell with oil. Growing speculation central banks will cut or avoid raising interest rates buoyed Asian markets in the midst of the worst start on record for global stocks. China’s Shanghai Composite Index, whose gyrations were the source of a lot of market tension in the first week of the year, added 0.8 percent.

All but one of the 10 sub-groups in the developing-nation stocks gauge rose, led by industrial shares, which extended Friday’s advance, the most since August. The ruble, Colombia’s peso and the Turkish lira pushed a measure of emerging-market currencies down for the first time in three days, while most of their Asian peers strengthened.

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