U.S. Stocks Climb on Oil Rally as Dollar Plunges Most in 7 Years

Oil at $30: Fundamentals vs. Momentum
  • Greenback sinks as services PMI fuels angst over U.S. economy
  • S&P 500 erases loss of 1.6% as WTI surges past $32 a barrel

The dollar sank the most in seven years against major currencies as data indicating a slowdown in service industry growth fueled concern over the strength of the U.S. economy. American stocks staged an afternoon rally, erasing earlier losses as crude oil rebounded.

The Bloomberg Dollar Spot Index slid as much as 1.9 percent as a gauge of U.S. services showed expansion had slackened to the weakest pace in nearly two years. The Dow Jones Industrial Average jumped more than 180 points, recouping some of Tuesday’s slump as Exxon Mobil Corp. led a rally among energy producers. U.S. crude surged more than 8 percent, swinging back to gains following its biggest two-day plunge in seven years. The jump in commodities saw Brazil’s Ibovespa rise the most among major indexes.

“Movements in WTI and broader U.S. indices remain very correlated and much of the move might simply be due to strength in WTI right now,” said Ryan Larson, the Chicago-based head of U.S. equity trading at RBC Global Asset Management Inc., which oversees $280 billion, referring to West Texas Intermediate crude oil. “We remain in a volatile environment, and today’s reasons for strength could easily be tomorrow’s reasons for weakness. It’s misleading in some senses - outside of the Dow we’re looking at a modestly mixed market.”

While data showing U.S. companies hired more than 200,000 workers in January provided a fresh sign that the labor market continues to power ahead, the services miss sparked concern that the largest part of the American economy isn’t immune to weakness elsewhere. The data tipped the fixed-income market’s balance toward zero rate hikes by the Federal Reserve this year, amid prospects central banks from Asia to Europe will act to quell the turmoil that’s roiled markets in 2016. The dollar’s drop underpinned oil’s surge, along with speculation OPEC and other oil producing nations have agreed to meet.

Stocks

The Standard & Poor’s 500 Index rose 0.5 percent to 1,912.53 as of 4 p.m. in New York, as gains of at least 4 percent for Exxon and Chevron Corp. pushed the Dow higher for the first day this week. U.S. stocks rose for the first time in February following a 5.1 percent drop in the S&P 500 last month that delivered its weakest start to a year since 2009. 

“This is an emotional, sentiment-driven market and it’s likely to remain tied to oil,” Michael James, managing director of equity trading at Wedbush Securities Inc. in Los Angeles, said by phone.

The Stoxx Europe 600 Index fell 1.5 percent as declines in banks dragged stocks lower for a third day. A gauge of lenders posted the worst performance, extending its lowest level since 2012.

The Ibovespa led gains among the world’s major stock markets Wednesday as a rebound in commodity prices spurred a rally in Vale SA and helped lift Brazil’s real. The index closed up 2.6 percent.

In Asia, futures on equity indexes were mixed after a 1.6 percent slump in the MSCI Asia Pacific Index. While contracts on stocks in Australia and South Korea advanced, those on indexes in Japan and Hong Kong signaled further declines. Nikkei 225 Stock Average futures in Osaka slipped 1.9 percent amid a 1.8 percent surge in the yen.

Currencies

The decline in Bloomberg’s dollar gauge -- which tracks the greenback against 10 major peers -- was the steepest since March 2009, when the Fed opened another front in its battle top bolster the economy by pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.

The dollar fell 1.7 percent to $1.1107 per euro and slid to 117.81 yen. Currency traders are catching up to the bond market, where 10-year yields sank to the lowest level in a year on Wednesday, while futures are sending the strongest signal yet that traders expect the Fed to stand pat on monetary policy in 2016.

“The currencies market has been at odds with the rates market, and now the rates market is winning,” Peter Gorra, head of foreign-exchange trading in New York at BNP Paribas SA. “There’s a disconnect where the Fed says it’s four hikes while the market says it’s like 0.7 hike this year -- someone is wrong.”

The dollar’s pullback this week has reversed all the losses incurred by the yen against the greenback last Friday, when Bank of Japan surprised markets by introducing negative interest rates to revive inflation, which is stuck near zero.

Currencies of commodity-linked nations posted the steepest gains versus the dollar Wednesday, with the Brazilian real, New Zealand dollar, Canada’s dollar and the Norwegian krone all climbing more than 2 percent.

Emerging Markets

The MSCI Emerging Markets Index fell for a second day, dropping 1 percent as equity benchmarks in India, Malaysia and the Philippines lost at least 1.2 percent each.

While stocks slid, a Bloomberg gauge of 20 developing-nation currencies rose for the first time in three days. The real surged 2.4 percent and the Russian ruble jumped 3.6 percent amid the gains in oil.

China’s yuan fell 0.3 percent to 6.6405 per dollar in offshore trading, after reaching 6.6512, its weakest level since Jan. 11. The currency was little changed onshore, trading at 6.5764 in Shanghai.

China’s central bank plans to loosen rules on when foreign investors can bring money in and out of the country, according to people with direct knowledge of the matter.
The changes would apply to funds under the Qualified Foreign Institutional Investor plan, said the people, who asked not to be identified as the plans have yet to be announced.

Bonds

Yields on 10-year Treasuries climbed four basis points, or 0.04 percentage point, to 1.88 percent, after falling to 1.83 percent, the lowest level since April 6. The U.S. Treasury said it will reduce issuance of longer-term debt this quarter and scale back sales of inflation-protected securities, while boosting offerings of bills as demand increases for short-term debt.

Demand for the relative safety of Germany’s government bonds pushed two-year bund yields to a record low even as a third consecutive auction failed to attract enough bids to achieve a sales target. Yields on 10-year Japanese bonds dropped to as low as 0.043 percent, the lowest ever for a 10-year sovereign note in a Group of Seven country.

The bond market is now signaling the chance of there being zero rate hikes from the Fed this year. Futures show traders expect the U.S. effective rate to reach 0.495 percent by year-end. That level is closer to the current effective overnight rate of 0.38 percent than it is to 0.625 percent, where it may stand if the Fed raises its target range by 25 basis points again, following liftoff from near zero in December.

Commodities

The Bloomberg Commodity Index rallied 1.9 percent for the first advance in three sessions.

WTI crude futures climbed 8 percent to $32.28 a barrel, as the falling dollar countered concerns in the market over a steep gain in U.S. crude inventories. Stockpiles expanded last week by more than 500 million barrels for the first time since 1930. Oil plunged 11 percent on Monday and Tuesday, the most since March 2009.

Analysts are projecting oil prices will soar more than $15 by the end of 2016. WTI will reach $46 a barrel during the fourth quarter, while Brent in London will trade at $48 in the same period, the median of 17 estimates compiled by Bloomberg this year show. Brent added 7.1 percent Wednesday to $35.04.

Zinc for delivery in three months led industrial metals higher, gaining 1.3 percent to $1,696 a metric ton on the London Metal Exchange. Lead climbed to the highest level in about a month, with copper, aluminum and nickel also gaining.

Spot gold prices jumped, rising 1.2 percent to $1,142.60 an ounce as the stock losses outside the U.S. fueled demand for haven investments. Silver gained 2.8 percent.

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