U.S. Stocks Slide With Commodities as Bonds Rise on Fed Comments

  • Oil drops beyond $42 a barrel with copper at six-year low
  • Fed's Lacker says caution is warranted in policy responses

Why Fed's Dudley Is Not Ready to Pledge December Liftoff

Stocks in the U.S. fell as concern slowing growth may spread throughout the global economy rekindled a selloff in commodities. The dollar retreated and Treasuries climbed as Federal Reserve officials emphasized the need for a cautious approach to monetary policy, while reiterating their desire to boost key interest rates this year.

The Standard & Poor’s 500 Index tumbled through its average price over the past 200 days as resource producers declined. Copper fell to its lowest price since 2009 and U.S. crude oil slid beyond $42 a barrel, spurring the Bloomberg Commodity Index to extend losses at its weakest point since 1999. The greenback slipped a second day versus major peers, while 10-year Treasuries extended their rebound from the lowest level since July.

Commodity shares are driving the U.S. stock gauge's retreat

Divergent signals on global monetary policy continue to dominate financial markets, with Fed officials talking up the case for policy tightening, while European Central Bank chief Mario Draghi hints at adding more stimulus. Data this week has provided a mixed picture on China’s economy, reinvigorating concern that demand for commodities will continue to wane while also fueling speculation officials there will resort to more easing.

“Fundamentals are taking a little bit of a back seat to some of the central bank talk and activity,” said Sean Lynch, co-head of global equity strategy for Wells Fargo Investment Institute. “We’re starting to see a little bit of cracks in emerging markets. Certainly I think China is the big weight on commodities, but there’s other factors that are causing this headwind to commodities, like the dollar.”

IG's Weston Says All Roads Lead to Stronger Dollar

U.S. equities accelerated losses after the normally dovish New York Fed President William Dudley said the central bank may need to begin tightening policy. Fed President James Bullard of St. Louis earlier in the day urged raising target rates, while Chicago Fed leader Charles Evans stressed any increases should be “gradual.” Draghi said in Brussels that downside economic risks are “clearly visible” and policy makers will reexamine the degree of accommodation in December.

Stocks

The S&P 500 dropped 1.4 percent to 2,045.97 by 4 p.m. in New York, sliding below its 200-day moving average for the first time in two weeks. The gauge has advanced just once in the seven sessions since Fed Chair Janet Yellen reminded investors that December’s meeting could usher in the first U.S. rate increase in six years. The index has failed to hold gains after rising to within 1 percent of its all-time high on Nov. 3.

A sub-index of S&P 500 energy stocks dropped 2.4 percent to a one-month low, while mining companies retreated 2 percent for their worst day since Sept. 28. The Russell 2000 Index of small-cap shares sank 2 percent as all of its industry groups fell.

European equities slid despite Draghi’s comments as the outlook for earnings worsened. The Stoxx 600 gauge lost 1.6 percent for its biggest retreat in six weeks.

The European benchmark is falling after it rallied 0.7 percent on Wednesday, the most in two weeks to 8.5 percent below its April record. Rolls-Royce Holdings Plc slumped 20 percent, the most since 2000, after saying next year’s earnings will suffer a 650 million-pound ($990 million) hit from declining demand for business-jet engines and lucrative maintenance services on bigger turbines.

Stocks in Asia climbed before the line-up of Fed speakers, with the MSCI Asia Pacific Index up 0.4 percent in a second day of gains. Futures on equity indexes from Japan to Australia were down in most recent trading.

Commodities

The Bloomberg Commodity Index tumbled 0.9 percent Thursday, declining for a seventh day in its longest losing streak in three months. Copper fell to a six-year low as losses deepened across the London Metal Exchange on concern that demand from China, the world’s biggest base metals consumer, is weakening. Copper slipped 2.4 percent while aluminum, tin, lead, zinc and nickel all sank at least 0.2 percent.

West Texas Intermediate oil retreated 2.8 percent to $41.75 a barrel in New York as government data showed U.S. crude stockpiles increased for a seventh straight week, exacerbating concerns over the global oil surplus. Inventories rose by 4.22 million barrels last week, according to an Energy Information Administration report.

Gold futures fell 0.4 percent to $1,081 an ounce in New York amid the Fed commentary around raising U.S. rates. Global holdings in exchange-traded products backed by gold dropped to the lowest level since March 2009 on Wednesday, data compiled by Bloomberg show.

Bonds

Treasuries extended gains on the Fed speakers, with bond traders giving weight to comments from Richmond Fed President Jeffrey Lacker, who said caution is warranted in policy responses to financial markets.

Yields on the benchmark U.S. 10-year note slipped a third day, declining two basis points, or 0.02 percentage point, to 2.32 percent, according to Bloomberg Bond Trader data. Yields on U.S. two-year notes, the maturity most sensitive to changes in Fed policy, were little changed at 0.88 percent, after reaching the highest level since May 2010 last week.

The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, rose 10 basis points to 454 basis points. That’s the highest level since Oct. 15 as the gauge rises for the sixth straight day, a streak not seen since September.

Emerging Markets

The MSCI Emerging Markets Index was little changed for a second day, hovering near a five-week low. Price swings in the index have doubled in the past 12 months amid concern the Fed’s first rate increase in nine years could crimp cash flow into riskier assets. The slowdown in China, lower commodity prices and political upheavals from Turkey to Brazil have further clouded the scope for gains.

Graph of the MSCI Emerging Market Index's 100-day volatility levels

Emerging-market currencies weakened against the dollar, with Colombia’s peso, Russia’s ruble and the South African rand leading a gauge of 20 developing-nation currencies down 0.4 percent following a two-day advance.

Currencies

Commodity-linked currencies fell, among them the Canadian dollar and Norway’s krone, as U.S. crude slumped for the sixth time in seven days. The Canadian dollar lost 0.2 percent to C$1.3286 per U.S. dollar, while the krone dropped 0.8 percent.

The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, slipped 0.3 percent, following a decline of the same magnitude on Wednesday.

The gauge soared to its highest level in a decade last Friday after a better-than-expected U.S. jobs report fueled bets on a rate increase from the Fed next month. A stronger greenback hits returns on dollar-denominated commodities and can erode the competitiveness of American exporters.

Odds that the Fed will boost borrowing costs at its last meeting of 2015 have risen to 66 percent, compared with 39 percent a month ago, according to futures data compiled by Bloomberg.

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