Bloomberg News

U.S. Stocks Rebound as Treasuries Climb, Emerging Markets Slump

April 15, 2014

Gold Bars

Gold dropped 1.1 percent Photographer: Kiyoshi Ota/Bloomberg

U.S. stocks climbed for a second day as optimism grew over corporate earnings and the Nasdaq Composite Index (CCMP) rebounded after falling near its average level for the past 200 days. Treasuries rose amid increasing tensions in Ukraine, while emerging markets slumped on signs China’s economy is slowing.

The Nasdaq Composite rose 0.3 percent at 4 p.m., erasing a 1.9 percent drop earlier. The Standard & Poor’s 500 Index (SPX) rose 0.7 percent as Coca-Cola Co. and Johnson & Johnson rallied on earnings reports. The yield on 30-year Treasuries slipped three basis points to 3.46 percent, touching the lowest level in nine months. The MSCI Emerging Markets Index tumbled 1.2 percent, the most in a month. Gold dropped 2 percent. Japan’s currency erased gains versus the dollar after Nikkei said the government will downgrade its economic assessment in a report this week.

Ukraine unleashed an offensive to dislodge militants from towns in its eastern Donetsk region as Russia’s prime minister said the country risks civil war. China’s money supply grew less than forecast and the broadest measure of credit fell 19 percent from a year earlier in March before data that’s expected to show economic growth slowed in the first quarter.

“Stocks are having meaningful moves in both directions because people are nervous on both sides,” Michael James, a Los Angeles-based managing director of equity trading at Wedbush Securities Inc., said in a phone interview. “Subjectivity plays such a pivotal role, and emotions, in what’s been going on in this market that it’s hard to pinpoint what causes a turn in the direction.”

Moving Average

The Nasdaq Composite fell to within four points of its 200-day moving average of 3,942.50 today before reversing. The last time the gauge dropped below that level, considered an important threshold by technical analysts, was Dec. 31, 2012. That’s the fourth-longest streak in the gauge’s 43-year history, according to Bespoke Investment Group LLC. The Nasdaq, along with other benchmark indexes, fell through 10-day through 100-day averages last week.

The S&P 500 has dropped 2.5 percent from its April 2 record and posted its worst weekly loss since 2012 as selling from Internet and biotechnology stocks, the best performers in a five-year rally, spread to the broader market. The Nasdaq Composite of technology shares sank 3.1 percent last week, and is down 7.4 percent from its March peak.

The Nasdaq Biotechnology Index rose 0.9 percent today, rebounding from an earlier 3.7 percent drop. The Dow Jones Internet Composite Index added 1.2 percent after sinking 2.3 percent earlier.

Higher Valuations

While equity returns will slow in coming years because of relatively higher valuations, the selloff in technology stocks will likely be contained, according to Cliff Asness, founder and chief investment officer at AQR Capital Management.

“There’s a difference between an expensive market and a bubble,” Asness said in an interview on Bloomberg Television’s “Market Makers.” “When you say something is going to return less than it used to, that doesn’t mean it’s going to crash. So I think we are poised for lower returns over the next 10 to 20 years from here.”

The S&P 500 trades at 17 times its members’ reported earnings. While that’s near its highest valuation in four years, it’s close to its weekly average since 1937, data compiled by Bloomberg show.

Manufacturing in the New York region grew at a slower pace in April, a report from the Federal Reserve Bank of New York showed. The index dropped to 1.29 from 5.61 in March. Economists surveyed by Bloomberg predicted it would increase to 8. Positive readings signal expansion in New York, northern New Jersey and southern Connecticut.

Earnings Season

Separate data showed the cost of living in the U.S. rose more than projected in March as food and rents became more expensive, helping ease Fed concerns that inflation is too low.

Coca-Cola gained 3.7 percent as global volume sales increased. Johnson & Johnson climbed 2.1 percent to a record as the company raised its forecast for the year.

Yahoo! Inc. and Intel Corp. advanced in extended trading after reporting quarterly results. Intel climbed 2.1 percent after earnings topped analyst estimates and the company projected second-quarter sales that may exceed some forecasts. Yahoo jumped 7.8 percent as sales surpassed estimates.

Alibaba Group Holding Ltd., China’s largest e-commerce company that is 24 percent owned by Yahoo, posted its fifth straight quarterly profit gain on surging sales ahead of a potential U.S. initial public offering.

Sorting Issues

Profit at S&P 500 companies probably fell 0.9 percent in the first quarter, analysts predict. At the beginning of the year, they had projected a 6.6 percent increase. Sales increased 2.6 percent in the first quarter, the estimates show.

“You’re in the process right now, in the short run, of sorting through earnings, as well as geopolitical and economic issues,” Chad Morganlander, a Florham Park, New Jersey-based portfolio manager for Stifel Nicolaus & Co., which oversees more than $150 billion, said in a phone interview. “There’s a tremendous amount of volatility and uncertainty because of concerns over Russia and Ukraine. That’s going to shift the winds of the market on a minute-by-minute basis.”

The Chicago Board Options Exchange Volatility Index, a gauge for U.S. stock volatility known as the VIX, dropped 3.1 percent to 15.61 today. The gauge is up 14 percent this year.

Treasury 30-year bond yields fell three basis points to 3.46 percent. Benchmark 10-year yields slipped two basis points to 2.63 percent.

Ukraine Crisis

Emerging-market stocks fell for a third day. Ukrainian units backed by armored personnel carriers blocked all approaches to the town of Slovyansk, Russia’s state-run RIA Novosti news service reported, citing an unidentified pro-Russian activist. Two militants were wounded when an airport in Kramatorsk was stormed, forcing the protesters to retreat, according to RIA.

The government in Kiev started the operation after fighting between its forces and pro-Russian separatists turned deadly this week. The U.S. and the European Union also deliberated deepening sanctions against Russia, which they blame for stoking the unrest, as Barack Obama and Russian President Vladimir Putin remained at odds over who was at fault.

Russia’s Micex Index (INDEXCF) slid 2.5 percent, while the ruble slipped 0.8 percent against the dollar to a three-week low. The Finance Ministry canceled its second ruble bond auction in a row, citing current market conditions.

Ukraine’s hryvnia jumped 9.2 percent versus the dollar after the central bank raised its benchmark interest rate by 3 percentage points to 9.5 percent.

European Stocks

Policy makers in Kiev said the rate increase, which is their first in six years and the biggest since Russia’s debt default in 1998, is aimed at stemming currency declines that threaten to boost inflation and disrupt money markets.

The Stoxx 600 fluctuated during the day, slumping during the final hours to finish 1 percent lower amid developments in Ukraine. The gauge rose 0.3 percent yesterday, after tumbling 3.1 percent last week.

SABMiller Plc (SAB) lost 2.3 percent after world’s second-largest brewer reported beer revenue that missed estimates and said it’s considering options for its stake in hotel and casino operator Tsogo Sun Holdings Ltd. L’Oreal SA (OR) gained 1.1 percent after the world’s largest cosmetics maker posted an increase in first-quarter revenue.

The Hang Seng China Enterprises Index of Chinese shares in Hong Kong dropped 2.1 percent. The Shanghai Composite Index (SHCOMP) lost 1.4 percent, the biggest decline in a month.

China’s Economy

Aggregate financing was 2.07 trillion yuan ($333 billion) in March, the People’s Bank of China said in Beijing today, down from 2.55 trillion yuan a year ago. M2, China’s broadest gauge of money supply, rose 12.1 percent from a year earlier, compared with the 13 percent median estimate of analysts in a Bloomberg News survey and 13.3 percent in February.

China’s gross domestic product grew 1.5 percent from the previous three months, according to the median estimate in a Bloomberg News survey ahead of data released tomorrow, down from 1.8 percent in the fourth quarter. That indicates a sharper deceleration than the median projection for 7.3 percent growth from a year earlier, down from 7.7 percent.

“You have this huge uncertainty from the geopolitical front and China, which is pulling the market in a negative direction,” Witold Bahrke, who helps oversee $55 billion as a senior strategist at PFA Asset Management in Copenhagen, said in a phone interview. “Sentiment is still tilted to the negative direction after the escalation in Ukraine at the weekend.”

Metals Slump

Copper dropped 1.9 percent to $6,541 a metric ton. China is the biggest buyer of the metal. Nickel declined 0.7 percent, falling for the first time in 12 days. Palladium retreated 1.8 percent, following a 5.7 percent gain in five days.

Gold declined 2 percent to $1,300.30 an ounce, the biggest drop in 16 weeks, on concern that a pickup in U.S. consumer prices will give the Fed leeway to further scale back stimulus.

The yen rose against most currencies as investor demand for safety increased. It erased gains versus the dollar after Nikkei said the government will downgrade its economic assessment in a report this week. The yen has rallied 2.6 percent this year in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

Australia’s currency declined 0.8 percent to 93.52 U.S. cents after appreciating to 94.61 cents on April 10, the highest level since Nov. 8. Minutes of the Reserve Bank’s latest meeting showed policy makers reiterated interest rates will stay on hold.

Italy’s 10-year yield fell seven basis points to 3.11 percent, reaching the lowest level since Bloomberg started collecting the data in 1993. Local buyers bid for more than 6.72 billion euros ($9.3 billion) of an Italian six-year, index-linked bond yesterday. The rate on similar-maturity Spanish securities fell five basis points to 3.09 percent.

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Callie Bost in New York at cbost2@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeff Sutherland


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