The Standard & Poor’s 500 Index (SPX) fell the most in three months, while Treasuries rallied with gold as demand for haven assets rose amid escalating tension in Ukraine and the Middle East. Sanctions against Russia intended to curb violence sent European markets lower.
The S&P 500 lost 1.2 percent for its first decline of at least 1 percent since April 10. The 10-year Treasury yield dropped six basis points to 2.46 percent at 4:30 p.m. in New York, while the rate on German 10-year bonds closed at a record low. The yen rose versus all of its 16 major peers and gold surged the most in four weeks on safety demand. Oil surged and the Chicago Board Options Exchange Volatility Index (VIX) jumped 32 percent, the most since April 2013.
Equities extended losses in the final hour of trading after Israel sent ground forces into the Gaza Strip in a military offensive intended to stop the barrage of missiles fired by Hamas and other Palestinian militants. The crisis in Ukraine escalated after a passenger jet crashed in the main battleground of the civil war, killing all 295 people on board. The government in Kiev blamed pro-Russian rebels for shooting down the Malaysian Airlines jet, while the separatists deny the accusation.
“People are selling out of fear,” Todd Lowenstein, a fund manager who helps manage $16 billion at Highmark Capital Management Inc. in Los Angeles, said in a phone interview. “The market is really acute to geopolitical risk. Given where valuations are and the move lately amid all the M&A activity, when you have some geopolitical shocks, people will look for a reason to sell.”
Equities fell earlier in the day while bonds rallied as the U.S. and the European Union imposed sanctions on Russian banks, energy companies and defense firms in the latest attempt to pressure the country to end support for Ukrainian rebels.
President Vladimir Putin has repeatedly denied Russian involvement in the fighting.
Airlines began shifting planes away from the region, which sits astride some of the busiest air routes between Europe and Asia. Deutsche Lufthansa AG, Air France-KLM and OAO Aeroflot are avoiding eastern Ukraine for now, and Delta Air Lines Inc. said it was staying away from the entire country.
“Markets have to figure out if this is really an escalation of the conflict,” John Canally, an economic strategist at LPL Financial Corp., said in a phone interview from Boston. His firm oversees about $447.1 billion. “Markets have already been here before. This Ukraine situation started in February and this is kind of another wave of the escalation.”
The yen strengthened 0.4 percent to 101.24 per dollar while the yield on 10-year Japanese government bonds fell one basis point, or 0.01 percentage point, to 0.53 percent, closing at the lowest rate in more than a year. The euro was little changed at $1.3527 and touched 137.18 yen, the weakest since Feb. 6.
Gold rallied 1.3 percent to settle at $1,316.90, the biggest gain in four weeks as the escalating tension in Ukraine fueled demand for haven assets. The metal fell to $1,292.26 on July 15, the lowest level since June 19, as investors assessed prospects for higher U.S. interest rates. Silver jumped 2.1 percent.
Crude oil rose 2 percent in New York to settle at $103.19 a barrel, the biggest gain since June 12. U.S. stockpiles fell as refiners in the world’s biggest oil consumer boosted processing to the highest level since 2005. U.S. airline stocks tumbled.
Wheat jumped the most since March after the jet crashed. Russia is the world’s fifth-biggest shipper, and Ukraine is ninth, International Grains Council and Eurostat data show.
The MSCI Emerging Markets Index lost 0.7 percent, declining for the first time in four days.
The S&P 500 increased 0.4 percent yesterday as companies from Time Warner Inc. to Intel Corp. rallied amid deals and earnings. The gauge advanced 7.2 percent this year through yesterday and trades at 18 times reported earnings, near the highest level in four years.
SanDisk Corp. sank 14 percent today, the most in the S&P 500, after posting profit margins and sales forecasts that fell short of some analysts’ estimates. Yum! Brands Inc. dropped 6.9 percent and Mattel Inc. lost 6.6 percent as results disappointed. AutoNation Inc. slid 8.2 percent as earnings missed forecasts.
UnitedHealth Group Inc. rose 1.6 percent for the biggest gain in the Dow Jones Industrial Average after its results topped projections. Microsoft Corp. advanced 1 percent after saying it will eliminate as many as 18,000 jobs, the largest round of cuts in its history.
Investors also considered data as the U.S. economy shows signs of recovering from a 2.9 percent contraction in the first quarter.
Reports today showed the Philadelphia Federal Reserve’s manufacturing activity index rose more than estimated, while the number of Americans filing applications for unemployment benefits unexpectedly dropped last week. Beginning home construction unexpectedly declined in June to a nine-month low.
U.S. equities’ record-breaking gains are sowing anxiety among financial professionals, with a Bloomberg poll showing three in five believe the market is heading for a bubble or already in one.
Forty-seven percent of respondents to the Bloomberg Global Poll said the equity market is close to unsustainable levels while 14 percent already saw a bubble, the quarterly survey of of 562 investors, analysts and traders who are Bloomberg subscribers. Almost a third of respondents called the market for lower-rated corporate debt overheated and most said stock swings will increase within six months, the July 15-16 poll showed.
Fed Chair Janet Yellen said yesterday asset valuations aren’t out of line with historical norms, after the central bank said a day earlier that prices for some stocks were stretched.
Fed Bank of St. Louis President James Bullard said gains in the U.S. labor market and inflation accelerating toward the central bank’s 2 percent target may prompt an earlier exit from unprecedented stimulus.
“If macroeconomic conditions continue to improve at the current pace, the normalization process may need to begin sooner rather than later,” Bullard said in remarks prepared for a speech today in Owensboro, Kentucky. He doesn’t vote on monetary policy this year.
Yellen told lawmakers yesterday the central bank plans to press on with record easing to combat persistent weakness in the job market.
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