U.S. Stocks Sink as Oil Rout Deepens With Emerging-Asset Selloff

  • S&P 500 has worst week since August as commodities tumble
  • High-yield ETF plunges as outlook for energy producers worsens

Oil Prices Continue to Slide, Here's Why

Global financial markets turned gloomy as the prospects for a Federal Reserve interest-rate increase next week and a drop in oil helped spark a selloff in riskier assets, from equities to commodities to high-yield debt.

QuickTake Oil Prices

U.S. stocks tumbled to a two-month low, with the Dow Jones Industrial Average dropping more than 300 points, while shares in developing nations extended the longest slump since June. Oil plunged below $36 a barrel to cap its worst week in a year, and junk bonds had their worst day since December 2012. Treasuries rallied with the yen on haven demand.

“There’s no where to hide out there and that’s why this is so brutal,” said Kevin Kelly, the New York-based chief investment officer at Recon Capital Partners, said by phone. “It seems like a redux of August when the Chinese actually devalued their currency in anticipation of a Fed rate hike and stronger dollar. There’s a lot of uncertainty with global growth that is just factoring into the year-end positioning.”

Volatility has returned to global financial markets just days before the Fed is anticipated to raise rates for the first time in more than a decade. With commodity prices at a 16-year low adding to concern that weakness in China’s economy will spread, investors are seeking havens on speculation that the change in central-bank policy will roil markets. Adding to investor anxiety Friday was news that Third Avenue Management took the unusual step of freezing withdrawals from a credit mutual fund.

Stocks

The Standard & Poor’s 500 Index slumped 1.9 percent to 2,012.37 at 4 p.m. in New York, to the lowest level since Oct. 14. The gauge sank 3.8 percent in the week. That’s the most since Aug. 21, when signs of slowing growth from China to Europe rekindled concern that weakness could spread to America.

“Certainly you’ve got the commodity price declines that continue and that’s leading to the stresses in the credit markets and when you see these stresses in the credit markets, equities usually suffer,” said Sean Lynch, co-head of global equity strategy for Wells Fargo Investment Institute. “You don’t have as much margin of safety so when you have some of these surprises to the markets, sometimes equities give a little back.”

The iShares iBoxx $ High Yield Corporate Bond exchange-traded fund, known by its ticker of HYG, tumbled 2.7 percent as oil extended its loss. Trading in the high-yield ETF options surged as billionaire investor Carl Icahnsaid more pain is coming. “The meltdown in High Yield is just beginning," he wrote on his verified Twitter account Friday.

Declines in the S&P 500 Friday may have been exacerbated by the expiration of a large number of put options on the S&P 500 and a related exchange-traded fund, according to a research note from Marko Kolanovic, a JPMorgan Chase & Co. strategist. Selling might accelerate further if the index slides below 2,000, he said.

The Chicago Board Options Volatility Index jumped 27 percent to 24.60, for a weekly surge of 66 percent, the most since August. The VIX closed at its highest level since Sept. 4.

Traders are pricing in a 72 percent chance that the Fed will raise rates at its Dec. 16 meeting, with data out of the U.S. Friday showing growth in retail sales and producer prices for November. That’s down from 80 percent earlier this week, amid the turmoil on financial markets.

The Stoxx Europe 600 Index tumbled 2 percent, taking its weekly loss to 4 percent. The regional benchmark fell to its lowest level since October and has sunk 7.7 in December amid a rout in commodity companies and disappointment over the European Central Bank’s last meeting.

Currencies

Currencies of commodity-exporting nations slumped as oil and iron ore prices tumbled. Australia’s dollar extended its biggest weekly slide since September. South Africa’s rand fell to a record, breaching 16 per dollar for the first time, after President Jacob Zuma unexpectedly fired his finance minister earlier this week. Brazil’s real, Norway’s krone and Mexico’s peso also fell. 

A gauge of 20 developing-nation currencies fell 0.9 percent, sliding 2.2 percent in the week, the worst performance since March. The ruble fell 0.6 percent on Friday. The currency stayed lower after the Bank of Russia kept interest rates on hold. Turkey’s lira dropped 1 percent.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, rose 0.1 percent Friday to cap a weekly gain of 2.3 percent. 

Bonds

Investors who piled into the riskiest corners of the credit markets during seven years of rock-bottom interest rates are getting a reminder of how hard it can be to cash out. With outflows from U.S. high-yield bond funds running at the fastest pace in more than a year, Martin Whitman’s Third Avenue Management took the rare step of freezing withdrawals from a $788 million credit mutual fund on Dec. 9.

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 36 basis points to 514.52 basis points, the highest since December 2012. BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, the largest fund of its kind, fell to the lowest levels since 2009.

U.S. 10-year yields fell nine basis points to 2.13 percent on Friday, compared with 2.17 percent on Dec. 31, 2014. The yield on similar-maturity German bunds was at 0.54 percent.

From the U.S. to Greece to Japan, all major developed government bond markets are poised to finish 2015 with a gain even as the Fed prepares to raise interest rates.

All 26 markets tracked by Bloomberg are poised to generate positive returns this year. Greek bonds led the gains with an 18 percent rally after the nation received an international bailout. Treasuries advanced 1 percent. Government securities also rose in Japan, Germany and Switzerland, pushing yields on some maturities in those nations below zero.

Emerging Markets

The MSCI Emerging Markets Index dropped 2.2 percent to the lowest close since August. The gauge dropped 5 percent in the week. Equity benchmarks in Indonesia and South Africa lost at least 1.6 percent on Friday.

The Hang Seng China Enterprises Index sank 1.5 percent, its seventh day of losses and the Shanghai Composite Index slid 0.6 percent to a five-week low. More than 30 senior executives of listed Chinese companies have gone missing or faced government probes this year, according to the state-run Securities Times.

The yuan fell 0.26 percent in Shanghai, taking its five-day loss to 0.86 percent, on speculation China’s central bank is taking advantage of a stronger dollar to weaken the currency before the U.S. raises rates. The yuan declined the most since August in offshore trading as China published a new index that values it against a broad range of currencies.

Commodities

Oil declined to the lowest level since 2008 in London amid estimates that OPEC’s decision to scrap production limits will keep the market oversupplied. West Texas Intermediate for January delivery slipped to $35.62 a barrel for the lowest settlement since 2009.

Crude capped its worst week in a year. The global oil surplus will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, the International Energy Agency said in a report released Friday.

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