U.S. equities fell, with benchmark gauges capping their worst week since June after a rally to a record left the Standard & Poor’s 500 Index at its most-expensive valuation in three years. Oil and metals advanced as Chinese industrial output expanded faster than estimated.
The S&P 500 lost 0.4 percent to 1,691.42 at 4 p.m. in New York and slid 1.1 percent for the week. West Texas Intermediate crude climbed 2.5 percent to $105.97 a barrel while zinc, nickel and lead jumped at least 1.9 percent. South Africa’s rand reached the strongest level this month against the dollar and Australia’s currency posted its biggest weekly gain since December 2011. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong advanced 1.2 percent.
The S&P 500 has rallied 19 percent in 2013 and closed at a record 1,709.67 on Aug. 2. The index trades at about 15.3 times projected earnings, up from a multiple of 13.1 at the beginning of this year and holding close to a three-year high reached last week. That compares to a five-year average of 13.9 times, data compiled by Bloomberg showed. Stocks and Treasuries have been whipsawed since May amid speculation the Federal Reserve will begin to reduce its quantitative easing as the economy improves.
“We have been losing enthusiasm over the course of recent days,” said Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland. “There still seems to be half the market that is focusing on improving fundamentals and the other is worried about the Fed removing quantitative easing sooner rather than later.”
Forty stocks in the S&P 500 closed at their highest levels in 52 weeks or longer yesterday, according to data compiled by Bloomberg, compared with 193 on May 15. Less than 79 percent of the 500 companies traded above their 50-day (SPX) moving averages, down from 93 percent on May 17.
Investors pulled money out of exchange-traded stock funds after last week’s record highs in benchmark indexes. Almost $1.20 billion was withdrawn from U.S. equity ETFs over the last four days, according to data compiled by Bloomberg from about 1,500 funds. About $32 billion of deposits went to the funds in July, the most since September 2008, the data show.
Credit Suisse Group AG cut its holdings of equities as global stocks rallied to a five-year high and Fed policy makers began considering whether to trim stimulus measures. Switzerland’s second-largest bank reduced its allocation to stocks to neutral from overweight, meaning it no longer holds more of the asset class than is represented in global benchmarks, according to a note to clients dated Aug. 5.
“The fundamental environment remains attractive, but the markets are overbought in the wake of the recent rally,” Michael Strobaek, the Zurich-based global chief investment officer at Credit Suisse, wrote in the report. The “combination of a positive economic outlook and a further supportive monetary policy seems largely priced into the markets. We therefore see limited upside in the near term,” he wrote.
Among stocks moving today, Gap Inc. dropped 3.1 percent after saying July sales at stores open at least a year rose less than analysts estimated. Nvidia Corp. lost 1.4 percent as it forecast third-quarter sales that missed analyst estimates on a weaker personal-computer market.
Cliffs Natural Resources Inc. added 11 percent as industrial metals rallied. Priceline.com Inc. (PCLN:US) climbed 3.9 percent as the largest U.S. online-travel agent by market value reported second-quarter sales that exceeded analysts’ estimates.
The S&P 500 rebounded almost 5 percent in July after slumping as much as 5.8 percent from May 21 to June 24 as Fed Chairman Ben S. Bernanke indicated the central bank could start tapering stimulus if the labor market continues to improve. The benchmark index has gained almost 8 percent since. Ten-year Treasury yields jumped from their 2013 low of 1.63 percent on May 2 to as high as 2.74 percent on July 5.
Charles Evans, Sandra Pianalto and Richard Fisher, regional Fed presidents in Chicago, Cleveland and Dallas, said this week the central bank may be closer to tapering. Data yesterday showed U.S. jobless claims fell in July to the lowest monthly rate since before the recession. Fed stimulus has helped propel the S&P 500 up more than 150 percent from its bear-market low in 2009.
Investors trying to protect against declines in U.S. stocks have spurred record demand for securities tracking equity volatility and traded more VIX options than ever before.
Shares outstanding of the iPath S&P 500 VIX Short-Term Futures ETN, a security designed to rise when stock fluctuations increase, have tripled this year, reaching a record 99.9 million on Aug. 5. Call volume on the Chicago Board Options Exchange Volatility Index rose to 1.12 million on Aug. 6, the most ever and about five times more than put trades, data compiled by Bloomberg show.
Equity investors are piling into securities that hedge losses as a way to protect gains after the S&P extended its rally to send the gauge past 1,700 for the first time. While volatility has evaporated in the past month amid economic data showing stronger U.S. growth, money managers including Lake Hill Capital Management LLC’s Justin Golden said investors are preparing for swings to increase. U.S. legislators must decide whether to raise the government debt limit later this year and most economists expect the Fed to cut the pace of bond purchases in September.
The retreat in U.S. stocks today halted an earlier global advance triggered by China’s economic data. Factory production in China grew 9.7 percent in July from a year ago, the government said today, compared with the 8.9 percent median estimate in a Bloomberg News survey of economists. The acceleration may bolster confidence that the nation will avoid a deeper economic slowdown after larger-than-forecast gains in exports and imports as well as improvement in gauges of manufacturing and service industries.
“Chinese data surprised to the upside this week which particularly benefited industrial metals,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen. There “could be a potential turnaround in expectations where the Chinese economy is heading over the coming months,” he said.
Copper climbed 1.3 percent in London and 3.9 percent this week, the most since September. All six of the main industrial metals on the LME rose, spurring a third day of gains for the LME metals index. China is the biggest buyer of industrial metals.
South Africa’s currency advanced 0.9 percent versus the dollar and is up 0.5 percent this week. The Aussie rose 0.9 percent, advancing 3.2 percent on the week for its biggest gain since December 2011.
The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major counterparts, was little changed after falling for five straight days. The gauge has declined 1.1 percent this week, the biggest drop since the period ended July 12. The yen strengthened 0.5 percent to 96.18 per dollar today.
Norway’s krone gained 1.3 percent against the euro, the most in four weeks, after a report showed inflation accelerated faster than economists estimated.
About two shares advanced for each that declined in the Stoxx Europe 600 Index. The index gained 0.6 percent this week. Royal KPN NV surged 16 percent in Amsterdam, the most in more than a year, after billionaire Carlos Slim’s America Movil SAB said it plans to make a takeover offer for the Dutch phone company.
The volume of shares changing hands in Stoxx 600 companies was 15 percent greater than the 30-day average, according to data compiled by Bloomberg. S&P 500 trading was about 10 percent below average.
The MSCI Emerging Markets Index rose for a second day, adding 0.5 percent and trimming this week’s decline to less than 0.5 percent. The benchmark for developing nations has lost almost 10 percent this year, trailing the S&P 500’s performance by almost 30 percentage points. The Shanghai Composite Index advanced 0.4 percent and Russia’s Micex Index added 1.5 percent. Exchanges in India, Malaysia, Indonesia, the Philippines, South Africa and Turkey were closed for holidays.
Junk-rated corporate bonds rose for a sixth week in Europe, paring a selloff in June after the cost of insuring securities against losses fell to the lowest in two weeks. Debt sales slowed.
High-yield bonds returned 0.2 percent this week, bringing the six-week gain to 2.1 percent after the securities lost an average 2.3 percent in June, according to Bloomberg bond index data. The Markit iTraxx Crossover Index of credit-default swaps on 50 high-yield companies was little changed this week at 399 basis points at 12:26 p.m. in London. The gauge fell to a two-week low of 392 on Aug. 5.
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