China Reality Check Halts Stock Rally While Treasuries, Yen Rise

China February Exports Fall 25.4%
  • S&P 500 ends five-day climb to fall first time in March
  • U.S. crude slips from 2-month high on supply glut concern

Global stocks fell as data showing a slump in Chinese exports spurred losses among metals and brought a five-day equity rally to a halt. Treasuries, the yen and Japanese government bonds climbed amid demand for haven investments.

Banks and commodity producers led declines in the Standard & Poor’s 500 Index, while the Dow Jones Industrial Average retreated after failing to erase losses earlier in the day. Nickel drove a selloff in industrial metals and iron ore pulled back as Goldman Sachs Group Inc. predicted gains in commodity prices would falter. Advances in Japanese bonds that sent yields to record lows helped bolster Treasuries and European debt. The yen strengthened against all but one of its 31 major peers, while gold retreated.

Sustained demand for precious metals and sovereign debt highlights a sense of uncertainty among investors when it comes to the rebounds in stocks and commodities. While almost $5 trillion was added to the value of global equities the past three weeks, some new data is reinforcing the misgivings that marked trading at the start of the year. Japan said Tuesday its economy contracted last quarter, while China reported the biggest tumble in offshore shipments in almost six years. That concern may raise the stakes as investors await a monetary policy review from the European Central Bank on Thursday.

“This is one of those fork-in-the-road type of days,” said Larry Peruzzi, managing director of international equities at Mischler Financial Group Inc. in Boston. “There hasn’t been a heck of a lot to move this market one way or another, and the market is trying to stabilize after doing well over the last couple of weeks.”

Stocks

The S&P 500 dropped 1.1 percent to 1,979.26 as of 4 p.m. in New York, snapping a five-day climb that pushed the index to a two-month high. The equity measure extended losses as energy and raw-materials companies fell at least 2 percent each amid a retreat in oil. The Dow lost 0.6 percent, or 110 points, even as Home Depot Inc. and McDonald’s Corp. advanced. Gains in last year’s momentum stocks were offset by losses in Apple Inc. and biotechnology companies in the Nasdaq 100 Index.

The Stoxx Europe 600 Index retreated 1 percent Tuesday, led by mining companies and auto companies. Gains in these sectors had helped the Stoxx 600 rebound as much as 13 percent from a Feb. 11 low.

Japan’s Topix dropped 1 percent after authorities said Asia’s second-largest economy contracted an annualized 1.1 percent last quarter, underscoring growing concern over Prime Minister Shinzo Abe’s reflation program.

MSCI Inc.’s All-Country World Index dropped 0.9 percent, halting a five-day advance. Energy producers slipped 3 percent, followed by materials companies, which lost 2.1 percent.

Emerging Markets

The MSCI Emerging Markets Index slid for the first time in eight days, losing 0.9 percent as the Chinese data reinforced concern over shrinking global demand. 

The rally that has almost erased this year’s decline in emerging-market assets probably won’t last as economic growth remains sluggish, according to Bhanu Baweja, a strategist at UBS AG, who correctly predicted the selloff in 2015.

“Leading indicators don’t point to a major inflection point,” Baweja, the head of emerging-market cross-asset strategy at UBS, wrote in an e-mailed research note Tuesday. While the pace at which developing-nation economies are weakening has moderated, it’s “more likely than not that we trudge along the bottom for a while rather than see a significant pick-up in growth,” he said.

A gauge of 20 developing-nation currencies fell 0.6 percent, its first decline in seven days. Weaker commodities and a wider-than-estimated current account deficit in South Africa weighed on the rand, while the Brazilian real added 0.8 percent after the central bank there stepped in to boost the supply of dollars on the market.

Currencies

The yen strengthened for a second day as investors hunted down the safest assets. It added 0.7 percent to 112.64 per dollar. Against the euro, the Japanese currency appreciated 0.8 percent to 123.97.

The yen has been the chief beneficiary of weeks of turmoil stemming from concern that global economic growth is slowing. Investors are weighing whether this strength can persist, even as the Bank of Japan carries out unprecedented stimulus policies that would typically weigh on the currency.

The euro was little changed at $1.1006, with the Bloomberg Dollar Spot Index, a gauge of the greenback versus 10 major peers, halted a six-day retreat, rising 0.2 percent.

Bonds

Japan’s 10-year government bond yield slid to an all-time low of minus 0.1 percent, after an auction of 30-year debt drew the strongest demand in almost two years despite a record-low coupon.

Yields on 10-year U.S. Treasuries fell eight basis points, or 0.08 percentage point, to 1.83 percent, retreating from a one-month high, while rates on similar-maturity German bunds slid four basis points to 0.18 percent as the five-year yield sank to minus 0.39 percent.

Pacific Investment Management Co. recommends investors move out of government bonds and into corporate credit on bets the U.S. will avoid a recession. With sovereign notes in Japan and Germany offering negative yields, and equity valuations stretched, the manager said high-quality company debt, junk bonds and bank loans offer a better risk-adjusted alternative.

Commodities

Nickel slid 8.5 percent in London from its highest close since November, while copper fell 2.6 percent, trimming this month’s advance to 3.7 percent. Goldman reiterated its view that the drivers for last year’s slump in industrial metals prices remain intact, predicting drops of as much as 20 percent for copper and aluminum over the next 12 months. Aluminum slipped 2 percent Tuesday.

“Higher prices are much harder to sustain in a supply-driven market since supply is primed to return with higher prices,” Goldman analysts wrote in the report. “But this lesson will likely only be learned through false starts.”

Iron ore with 62 percent content delivered to Qingdao, China dropped 0.2 percent to $63.63 a dry metric ton, Metal Bulletin Ltd. data showed, following a record 19 percent jump on Monday. Citigroup Inc. said it’s still bearish as supply and demand fundamentals remain weak, while Axiom Capital Management Inc. said the price surge was probably just a “blip.”

West Texas Intermediate oil fell 3.7 percent to $36.50 a barrel, after surging 5.5 percent on Monday. U.S. crude has advanced more than 40 percent since slumping to a 12-year low last month amid speculation a proposal by major producers to freeze production will trim a global glut. Data on Wednesday is forecast to show U.S. stockpiles increased last week to the highest level since 1930.

Gold, which often moves in line with haven assets like the yen, fell 0.5 percent in the spot market to $1,261.40 an ounce. It’s still up 19 percent in the year.

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