Stocks Decline on Emerging-Market Risk as U.S. Drugmakers Tumble

  • Demand for short-dated Treasuries shows doubts on Fed move
  • Oil falls to one-week low on surprise U.S. crude supply gain

Are Markets Too Complacent?

Stocks fell as heightened political and security risks rattled emerging markets, oil tumbled and U.S. biotechnology stocks had their biggest drop in two months as politicians decried drug price hikes.

Developing-nation shares slid after Turkey launched a military operation in Syria, while North Korea conducted a missile test. South Africa’s rand sank as the nation’s finance minister refused to report to police amid a probe. Drugmakers dragged the S&P 500 Index lower as Mylan NV drew the ire of lawmakers over a price increase of a life-saving allergy shot, which Democratic presidential candidate Hillary Clinton dubbed “outrageous.” Oil sank on data showing U.S. stockpiles rose. Investors including foreign central banks and mutual funds bought a record amount at a Treasury debt sale.

The recent flare-ups in emerging markets drove trading earlier Wednesday as they exposed the frailty of a rally spurred in part by investors seeking refuge from low or negative rates in developed economies. All the angst added more pressure to global market sentiment at a time when traders are looking for clues on how aggressive the Federal Reserve will be in its approach to tightening before Chair Janet Yellen’s speech on Friday. The late-session slide in equities disrupted a recent period of tranquility that has seen the U.S. stock volatility gauge on track this month for its lowest mean level for any August since 1994.

“You have the news about drug pricing, and you had oil come down a bit,” said Matt Maley, an equity strategist in New York at Miller Tabak & Co LLC. “I don’t know why we reacted to them later in the day, other than we’re getting close to Yellen’s speech on Friday.”

The probability of a U.S. rate hike next month rose to 28 percent from 24 percent at the start of this week, and the chances by the end of the year increased to 54 percent, according to data compiled by Bloomberg from fed fund futures.

In another sign of mixed U.S. economic data, the National Association of Realtors said sales of previously owned homes dropped more than forecast in July from a nine-year high. The report came a day after the Commerce Department said purchases of new homes unexpectedly jumped.

Stocks

MSCI’s global stock index dropped 0.5 percent at 4 p.m. in New York, erasing this week’s gains. A measure of emerging-market shares lost 1.1 percent. Turkish equities slumped 1.6 percent as the nation aims to force Islamic State militants away from its border and deter further advances by Syrian Kurds allied with separatists.

The S&P 500 fell 0.5 percent, with losses accelerating in afternoon trading, led by Mylan NV’s 5.4 percent slide. Investors were spooked by Clinton’s comments, a reminder of critical remarks she made last year on drug prices which helped spur a 20 percent selloff in the Nasdaq Biotechnology Index.

“The healthcare and biotech selloff was pretty significant -- the comments from Hillary slapped these stocks all the way down,” said Dave Lutz, the head of ETF trading for JonesTrading Institutional Services. “Biotech is what took the wind out of the sails; nobody saw that coming. It reminds investors of the headline risk going into the election in this sector.”

Teva Pharmaceutical Industries Ltd. also slumped after a U.S. agency invalidated two of the patents protecting Copaxone, a multiple sclerosis drug that generates 20 percent of its revenue.

European equities climbed for a third day as a gauge of banks reached its highest level since the U.K. referendum on European Union membership. Italy’s UniCredit SpA surged 8 percent, while Commerzbank AG and UBS Group AG added at least 2.9 percent. At the same time, a measure of volatility is recording its lowest monthly average since March 2015.

Bonds

Strong demand at Wednesday’s Treasury five-year note auction added to evidence that markets aren’t yet wholly convinced that the Fed is poised to tighten policy this year.

The lack of clarity on the timing of the Fed’s next move has confined Treasuries to tight trading ranges this month. Officials project the policy rate will rise this year, even as some have expressed longer-term concern that it may not climb to levels seen in previous economic cycles. Chair Yellen speaks Friday at a symposium in Jackson Hole, Wyoming.

“The conditions for the Fed to hike rates again -- above-trend growth, improved financial conditions, and rising inflation expectations -- have not been met,” John Bellows, a money manager at Pasadena, California-based Western Asset Management Co., which oversees $460 billion of fixed-income assets, wrote Wednesday. “Yellen is likely to avoid the question of the timing of the next hike and focus instead on the bigger picture considerations."

Treasury five-year note yields were little changed at 1.14 percent, according to Bloomberg Bond Trader data. The yield on two-year securities was 0.76 percent, while the benchmark 10-year note yield was 1.56 percent.

South Africa’s benchmark government bond yields due December 2026 surged 53 basis points to 9.05 percent. Finance Minister Pravin Gordhan said that he had done nothing wrong by authorizing the establishment of a special investigative unit when he headed the national tax agency and he wouldn’t obey a police instruction to present himself for questioning.

Currencies

The JPMorgan Chase & Co. gauge of currency price swings rose to 10.31, the highest since July 25.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, rose 0.2 percent. The U.S. currency strengthened 0.4 percent to $1.1264 per euro, and 0.2 percent to 100.45 yen. The pound rose to a three-week high as data continued to suggest the U.K. economy is proving resilient to the secession vote.

Most emerging-market currencies fell as South Africa’s rand sank to the lowest level in a month. South Korea’s won led losses in Asia after North Korea’s missile launch added to the mounting geopolitical tension in the region. Both Mexico’s peso and Brazil’s real rose.

Commodities

West Texas Intermediate for October delivery dropped 2.8 percent to close at $46.77 a barrel on the New York Mercantile Exchange.

Crude inventories climbed by 2.5 million barrels in the week ended Aug. 19, according to an Energy Information Administration report. A Bloomberg survey ahead of the data had forecast inventories would fall by 850,000 barrels. Iran’s oil ministry said the country hasn’t yet decided whether to join informal OPEC talks next month in Algiers following a Reuters report that the nation had confirmed its attendance at the gathering.

"We’re still in a fundamentally oversupplied market," said Adam Wise, who helps run a $7 billion oil and natural gas bond and private equity portfolio at John Hancock in Boston. "The build was unexpected and comes amid a lot of OPEC chatter making for a sloppy, if range-bound market."

Copper fell for a fourth day, erasing its gains for the year, on surging inventories and signs of weak demand in China, the biggest consumer. Gold and silver also retreated.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE