- S&P 500 drops 1 percent, pares worst of slide amid strong data
- Emerging currencies sink as China weakens yuan; oil tumbles
U.S. stocks headed for a three-month low and emerging-market equities fell to the cheapest since 2009. Developing-nation currencies sank to a record, with Korea’s won weakening after North Korea’s claim of a nuclear test added to geopolitical risks already heightened by Middle East tensions. Brent crude reached its lowest level since 2004 on glut concerns. The yen strengthened and Treasuries rose for a fifth session.
“This is risk aversion right now,” Benjamin Dunn, president of Alpha Theory Advisors, which works with hedge funds overseeing about $6 billion. “This is like a replay of the same things that moved the markets in August. 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 growing tolerance for a weaker yuan signaled the government is struggling in its efforts to shore up economic growth and rekindled concern seen in August, when a shock devaluation sent U.S. stocks to their first correction in four years amid worry China’s slowdown would hamper global growth. Disinflation in Europe and a renewed selloff in commodities may make it harder for central banks to meet their policy goals.
The MSCI All-Country World Index fell 1.1 percent at 10:34 a.m. in New York. The Standard & Poor’s 500 Index dropped 1.1 percent, headed for its lowest close since October. The Dow Jones Industrial Average fell 195 points.
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 March. The Chicago Board Options Volatility Index rose 6.7 percent to 20.63.
U.S. equities pared losses amid data that eased concerns about the strength of the world’s largest economy. American service companies continued to outperform their manufacturing counterparts in December, as orders and employment picked up. A separate report showed companies added more workers than projected last month, two days before the government’s jobs report.
“I don’t know we’ll see a panic unless we see it extend for several more days,” David Spika, global investment strategist for GuideStone Capital Management, said by phone. “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.”
The Stoxx Europe 600 Index slid 1.4 percent. Commodity producers and carmakers -- companies with some of the largest sales exposure to China -- led declines. Tuesday’s rebound from the worst-ever start to the year was short-lived and the Stoxx 600 is down 3.4 percent this week.
The MSCI Emerging Markets Index slid 1.1 percent to the lowest since July 2009, with all all but one of the 10 industry groups retreating. Technology companies led losses, tumbling to the lowest level since September. Benchmark gauges in Hong Kong, Taiwan and Saudi Arabia dropped at least 1 percent.
The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong fell 0.9 percent, while the Shanghai Composite Index jumped 2.3 percent amid efforts by authorities to support the market. Marc Faber, publisher of the Gloom, Boom & Doom Report said in an interview on Bloomberg TV the Chinese economy may be headed for a “hard landing” as borrowers are taking on record amounts of debt to repay interest on their existing obligations.
The Bloomberg-JPMorgan Asia Dollar Index fell to the lowest level since April 2009 as the People’s Bank of China lowered its daily fixing by 0.22 percent to the weakest level since April 2011, raising the risk other nations will need to lower their exchange rates to remain competitive.
“This isn’t good for the rest of the world. Until China stops weakening the yuan, global markets will struggle to stabilize,” said Koichi Kurose, Tokyo-based chief market strategist at Resona Bank Ltd. “The Chinese authorities may be trying to prop up the economy by boosting exports, but while that’ll help one part of China’s economy, it comes at the sacrifice of someone else.”
South Korea’s won fell 0.8 percent to the weakest level since September while the equity benchmark slipped 0.3 percent. North Korea said it successfully tested a hydrogen bomb, a move that escalates tensions on the peninsula with neighbors South Korea and Japan.
The yen appreciated 0.5 percent to 118.42 per U.S. dollar and reached 118.25, the strongest since Oct. 15. Japan’s currency surged more than 1 percent against the yuan to the highest level since October 2014, just before the Bank of Japan expanded monetary easing.
Australia’s currency fell 1.2 percent and reached the lowest since November while the New Zealand dollar tumbled 0.9 percent. China is the largest export market for both South Pacific nations.
Treasuries advanced with the yield on 10-year notes falling five basis points to 2.18 percent.
Euro-region government bonds also gained, pushing the yield on 10-year German debt to 0.50 percent, the lowest in more than a month, as signs of slowing global growth and a further drop in oil boosted demand for fixed-income assets.
“We’ve started this year in a funk,” said Richard Kelly, head of global strategy at Toronto-Dominion Bank in London. “You had the big liquidity shock out of China the first day back, and from that perspective fixed income is still prone to rallying.”
Germany sold debt due in 2017 with an average yield of minus 0.38 percent, matching the lowest on record. The nation received enough bids to reach its sales goal. The securities were auctioned to yield minus 0.32 percent at a previous sale last month.
The cost of insuring corporate debt rose to the highest in about two weeks. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies climbed one basis point to 82 basis points. The Markit iTraxx Europe Crossover Index of swaps on junk-rated companies jumped 10 basis points to 339 basis points.
Oil slumped before weekly U.S. government data forecast to show stockpiles rose in the world’s biggest crude consumer.
Brent crude for February settlement fell as much as $1.80 or 4.9 percent, to $34.62 a barrel on the London-based ICE Futures Europe exchange. West Texas Intermediate declined 3.3 percent after dropping 2.2 percent Tuesday.
U.S. oil inventories probably increased by 500,000 barrels last week, according to a Bloomberg survey before Energy Information Administration data Wednesday. The industry-funded American Petroleum Institute was said to report stockpiles fell by 5.6 million barrels while fuel supplies gained.
Gold for immediate delivery advanced 0.9 percent to $1,086.82 an ounce following two days of gains. Demand for the precious metal has been bolstered as gyrations in global stock markets enhance its allure as a haven investment.
Zinc on the London Metal Exchange dropped 2.3 percent to the lowest since Dec. 29. Copper fell 1 percent.