U.S. Stocks Tumble to Three-Month Lows After China Weakens Yuan

  • Commodity producers lead retreat, Brent crude hits 11-year low
  • North Korean nuclear bomb test adds to geopolitical worries

Why Are Global Markets So Transfixed by the Yuan?

U.S. stocks tumbled to three-month lows, following equities around the world after China weakened its currency, stoking investor concern that a slowdown in the world’s second-largest economy will damp global growth.

Energy and raw-material companies in the Standard & Poor’s 500 Index led the selloff, losing at least 2.6 percent as China’s move revived the angst that sent financial markets into turmoil last summer. Chevron Corp. declined 4 percent, while copper producer Freeport-McMoRan Inc. slid 8.1 percent. Seven of the benchmark’s 10 main industries dropped at least 1 percent.

The S&P 500 lost 1.3 percent to 1,990.26 at 4 p.m. in New York, trimming a drop of as much as 1.9 percent while sliding to its lowest level since Oct. 6. The Dow Jones Industrial Average fell 252.15 points, or 1.5 percent, to 16,906.51, bringing its three-day loss to 3 percent, its worst start to a year since 2008. The Nasdaq Composite Index dropped 1.1 percent. About 8.2 billion shares traded hands on U.S. exchanges, 17 percent higher than the three-month average.

“This is risk aversion right now,” said Benjamin Dunn, president of Alpha Theory Advisors, which works with hedge funds overseeing about $6 billion. “Not a lot of people had conviction coming into the year after a violently flat to down year, and now we’re perhaps getting confirmation that China is as bad as people think. We’ve lost the tailwinds from the Fed and investor enthusiasm, and this adds to the mosaic of fear that’s out there right now.”

China’s central bank set the yuan’s reference rate at an unexpectedly weak level, adding to anxiety about an economic slowdown that has dominated markets this week. The S&P 500 on Monday kicked off 2016 with its worst start in 15 years. Adding to geopolitical worries, North Korea claims it successfully tested its first hydrogen bomb, which follows a recent buildup of tension between Saudi Arabia and Iran.

Commodity producers fell amid speculation that weakness in China would weigh on demand for raw materials. Brent crude oil dropped below $35 a barrel to its lowest since 2004, while West Texas Intermediate futures lost more than 5 percent. Apache Corp. and Murphy Oil Corp. tumbled 11 percent to the steepest losses in seven years.

China’s currency devaluation last August triggered a global rout that drove the S&P 500 to its first correction in four years, after it had reached an all-time high as recently as May. Now, UBS Group AG’s technical strategists predict the U.S. benchmark will enter a bear market as early as this year.

Weak Beginning

The S&P 500 has fallen 2.6 percent in the first three days of the year. That’s better than the 2.7 percent plunge to start 2015, which marked the worst opening since 2008. The index swung wildly last January before ending the month lower by 3.1 percent. The poor start to 2016 has left the benchmark index 6.6 percent below its all-time high set in May.

Sentiment has turned more cautious on stocks after the Federal Reserve’s first interest-rate increase since 2006 and forecasts for little to no growth in corporate earnings until the spring. Fed officials have stressed that while the pace of future hikes will be gradual, it will depend on progress in economic data.

A report Wednesday showed companies added more workers than projected in December, indicating the job market had momentum as 2015 came to a close. Separate data showed service companies continued to outperform their manufacturing counterparts last month as orders and employment picked up. Another report said factory orders in November fell, in line with forecasts from economists surveyed by Bloomberg.

Equities offered little reaction to the Fed’s latest meeting minutes, which showed some policy makers saw the decision to raise interest rates as a “close call.” Minutes from the December gathering said “almost all” of the rate-setting committee’s participants were satisfied the criteria for tighter policy had been met.

Volatility Climbs

The Chicago Board Options Exchange Volatility Index rose 6.5 percent to 20.59, after earlier surging as much as 13 percent. The measure of market turbulence known as the VIX jumped nearly 14 percent Monday to a three-week high, before slipping 6.6 percent yesterday.

“I don’t know we’ll see a panic unless we see it extend for several more days,” said David Spika, global investment strategist for GuideStone Capital Management. “We started the year with a low level of conviction. We’ve conditioned our clients for much higher levels of volatility -- to expect the market to go straight up is not very smart.”

While investors cope with turbulence sparked by China, another source of consternation is looming as the corporate earnings season for 2015’s final quarter soon begins. Alcoa Inc. is scheduled to report results on Monday, with JPMorgan Chase & Co. and Intel Corp. also due next week. Analysts forecast profits for companies in the S&P 500 fell 6.1 percent last quarter.

Energy companies in the benchmark index, which are forecast to post a 68 percent drop in fourth-quarter earnings, were the hardest hit group Wednesday, falling 3.6 percent to the lowest level since August.

Automakers Slump

Ford Motor Co. and General Motors Co. continued their losing streaks, down at least 3.5 percent after sales reports yesterday disappointed. GM fell for an eighth day, the longest stretch in five months. AutoNation Inc. tumbled 11 percent, the most since 2009, after saying it expects to report significant margin declines for the fourth quarter amid a tougher sales environment.

“Sentiment right now is tarnished partially over earnings but also because the pace of global growth is slow and geopolitical tensions are rising,” said Terry Sandven, who helps oversee $126 billion as chief equity strategist at U.S. Bank Wealth Management in Minneapolis. “In the absence of earnings visibility and given global headwinds, we’re in store for a market going sideways to down.”

Among the few bright spots Wednesday, Netflix Inc. jumped 9.3 percent, the most since July and the online video company’s first gain in five days. It began selling its streaming service in India and more than 100 other countries, a major step toward its goal of becoming the first global online television service.

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