Stocks Run Out of Steam With Bonds, Dollar Before Yellen Speech

Investors Brace for Fed's Yellen's Speech
  • Oil rebounds as Iran seen taking part in informal OPEC meeting
  • Asian index futures mixed with investors in wait-and-see mode

Traders pushed down the value of U.S. stocks, bonds and the dollar before a speech by Federal Reserve Chair Janet Yellen that may provide clues as to the path for interest rates in the world’s largest economy.

Treasury yields rose as a sale of seven-year notes drew the weakest demand since February, while drugmakers led U.S. equity losses as Mylan NV’s move to alleviate the cost burden on its allergy shots was blasted by members of Congress. The dollar traded near a three-month low. European shares slumped amid a drop in German business sentiment. Oil rebounded after a report that Iran will participate in an informal meeting of OPEC members.

Investors have boosted wagers on higher U.S. rates at a time when uneven global growth is casting doubt over the Fed’s ability to diverge from the trend toward boosting stimulus in other developed economies. While minutes of the central bank’s July meeting showed divisions within the rate-setting committee, regional Fed chiefs have signaled that a hike may come before the end of 2016. Odds of such a move by September have risen to 32 percent, from 18 percent at the start of the month, Fed fund futures show. Traders assign a 59 percent probability of a rate increase this year, according to the data.

“Given the back and forth and the constant changes in the Federal Reserve discussion, the market is waiting for some clarity,” said Quincy Krosby, a market strategist at Prudential Financial Inc. in Newark, New Jersey. “It’s going to be a wait and see.”

Yellen will speak at the Kansas City Fed’s annual mountain retreat in Jackson Hole, Wyoming Friday at 8 a.m. local time. The formal topic of her remarks -- “The Federal Reserve’s Monetary Policy Toolkit” -- implies a technical focus on the challenges facing the central bank in an era of tepid growth and slow inflation. Investors are hoping for some description of the economy in the chair’s first public comments since June, as well as some clarity over the Fed’s rate outlook. The central bank’s next meeting is Sept. 20-21.

Fed Bank of Kansas City President Esther George, speaking in a Bloomberg Television interview with Michael McKee, said the U.S. nearing full employment and inflation accelerating toward the central bank’s target should prompt higher rates. Dallas Fed chief Robert Kaplan separately told CNBC television that “the case is strengthening” for another increase.

Stocks

The S&P 500 Index fell 0.1 percent as of 4 p.m. in New York. The benchmark gauge has held within a rough 30-point range for three weeks as traders awaited signals from policy makers.

“You know that Janet Yellen is going to come out and say something, and you have no idea what,” said Ben Kumar, an investment manager at Seven Investment Management LLP in London. His firm manages 10 billion pounds ($13 billion). “Your sensible move would be to be a bit nervous. So there seems to be some sensible profit taking, or moving to cash, or just sitting on the sidelines.”

Mylan fell for a fifth day, declining 0.7 percent. In response to intense criticism, the drugmaker acted to expand assistance programs that help patients with high out-of-pocket expenses, but didn’t go as far as cutting the treatment’s list price. Health insurers and U.S. lawmakers, along with Democratic presidential candidate Hillary Clinton, criticized the effort as an attempt to cover a 400 percent price hike that won’t make the drug more affordable.

Dollar General Corp. and Dollar Tree Inc. tumbled after the discount retailers posted disappointing sales, a sign that cuts in food-stamp programs are taking a toll. Tiffany & Co. climbed after the luxury jewelry retailer posted profit that topped analysts’ estimates.

European shares posted their biggest drop in more than three weeks as a disappointing German sentiment report highlighted lingering concern over global growth. Drugmaker losses dragged down the Swiss Market Index, while Italy’s FTSE MIB Index retreated amid a bank slide.

The MSCI Emerging Markets Index staged a comeback, gaining 0.2 percent as benchmarks from Russia to Turkey and Taiwan advanced. Chinese stocks fell to their lowest level in nearly two weeks on concern the government will act to cool speculative activity in the nation’s financial markets.

Futures signaled a mixed day ahead for Asia, with contracts on Japan’s Nikkei 225 Stock Average declining, while those on stocks in Australia and Hong Kong climbed.

Bonds

Yields on two-year Treasuries rose three basis points, or 0.03 percentage point, to 0.79 percent in New York, according to Bloomberg Bond Trader data. Benchmark 10-year yields increased one basis point to 1.58 percent.

History suggests that a Fed rate increase benefits longer-maturity bonds more than their short-dated counterparts. Every time the central bank has raised rates over the past four decades, betting that longer-term Treasuries would outperform short-term notes has proved to be a winner, according to data compiled by Bloomberg. Higher rates helped stem inflation and keep economic growth from overheating.

A gauge of demand fell to its lowest point since February at a $28 billion auction of seven-year notes Thursday. The decline in buyer interest comes after a $34 billion five-year debt sale Wednesday saw the greatest demand on record from indirect bidders, a class of investors that includes foreign central banks and mutual funds. Demand at a $26 billion two-year note auction on Aug. 23 was the highest since May.

“Markets are eagerly awaiting some clarity,” said Brian Smedley, the Santa Monica, California-based head of macroeconomic and investment research at Guggenheim Partners, which manages $240 billion. Investors “are a little bit tired, a little bit struggling to know how to weigh the many views that are being shared and the debates that are going on in public.”

Currencies

The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, declined 0.1 percent after climbing 0.8 percent over the last four trading sessions. The dollar fell 0.2 percent to $1.1285 per euro, while strengthening 0.1 percent to 100.53 yen.

Jackson Hole has only been a big market mover once in the past 10 years, when former Fed Chairman Ben S. Bernanke signaled the second round of quantitative easing in 2010, according to Bank of America Corp. Meanwhile, Citigroup Inc. said a survey of investors shows asset managers are positioning for a Fed hike once this year followed by a slow approach to further monetary tightening, presenting headwinds for the dollar.

“One hike in December and a very flat path into the distant future -- investors are waiting for confirmation that that’s the intention and nothing worse,” said Steven Englander, global head of Group-of-10 currency strategy at Citigroup in New York. Citigroup topped Euromoney magazine’s 2016 ranking of the world’s largest currency traders.

Emerging-market currencies rose, led by Colombia’s peso. South Africa’s rand slumped as President Jacob Zuma said that while he has “full confidence” in his finance minister, he has no power to stop a police probe into allegations that Pravin Gordhan established an illicit investigative unit during his tenure as head of the national tax agency.

Commodities

Oil rose after a report that Iran’s Oil Minister Bijan Namdar Zanganeh will participate in an informal gathering of OPEC members next month in Algiers. Prices surged this month partly on speculation that informal discussions among members of the Organization of Petroleum Exporting Countries and other producers may lead to action to stabilize the market.

"The news about the Iranian Oil Minister heading to Algiers is bullish," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "This increases the likelihood of an agreement to freeze production. It would be a freeze at very high levels, but the market still would take that as bullish."

West Texas Intermediate oil for October delivery rose 1.2 percent to $47.33 a barrel on the New York Mercantile Exchange. The contract slid 2.8 percent to $46.77 on Wednesday, the lowest close since Aug. 16.

Gold futures for December delivery slid 0.4 percent to settle at $1,324.60 an ounce on the Comex in New York, the fourth drop in five sessions. The metal’s 30-day historical volatility measure dropped to its lowest point since October 2014.

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