S&P 500 tumbles, bonds rally as geopolitical tension escalates
New York: Standard and Poor’s (S&P) 500 Index fell the most in three months, while Treasuries rallied with gold as demand for haven assets rose amid escalating tension in Ukraine and West Asia. Sanctions against Russia intended to curb violence sent European markets lower.
The S&P 500 lost 1.2% at 4pm in New York, its first decline of at least 1% since April 10. The 10-year Treasury yield dropped six basis points to 2.46%, 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. The Chicago Board Options Exchange Volatility Index jumped 34%, the most since April 2013.
Equities extended losses in the final hour of trading after reports that Israel began a ground operation in the Gaza Strip. Prime Minister Benjamin Netanyahu’s office confirmed the reports. 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 (mergers and acquisitions) 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 US and the European Union (EU) imposed sanctions on Russian banks, energy companies and defence firms in the latest attempt to pressure the country to end support for Ukrainian rebels.
President Vladimir Putin, speaking about the sanctions earlier in Brazil, said this aggressive response to the four-month uprising by pro-Russian insurgents in eastern Ukraine will only have a boomerang effect that will hurt the US’s own interests.
The Barack Obama administration’s targets include OAO Rosneft, Russia’s largest oil company and natural-gas producer OAO Novatek. The leaders of the 28-nation bloc agreed to blacklist companies and halt lending to public-sector projects in Russia.
“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 Stoxx Europe 600 Index fell 0.9% as Russia’s benchmark stock index dropped to the lowest since May. Rosneft tumbled 4.5% and Novatek slid 5.1%, the most since March.
The yen strengthened 0.4% 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%, 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 6 February.
Gold rallied 1.3% to settle at $1,316.90, the biggest gain in four weeks as the escalating tension in Ukraine fuelled demand for haven assets. The metal fell to $1,292.26 on 15 July, the lowest level since 19 June, as investors assessed prospects for higher US interest rates. Silver jumped 2.1%.
Crude oil rose 2% in New York to settle at $103.19 a barrel, the biggest gain since 12 June. US stockpiles fell as refiners in the world’s biggest oil consumer boosted processing to the highest level since 2005. US 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 shows.
The MSCI Emerging Markets Index lost 0.7%, declining for the first time in four days.
The S&P 500 increased 0.4% on Wednesday as companies from Time Warner Inc. to Intel Corp. rallied amid deals and earnings. The gauge advanced 7.2% this year through yesterday and trades at 18 times reported earnings, near the highest level in four years.
SanDisk Corp. sank 14% on Thursday, 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% and Mattel Inc. lost 6.6% as results disappointed. AutoNation Inc. slid 8.2% as earnings missed forecasts.
UnitedHealth Group Inc. rose 1.6% for the biggest gain in the Dow Jones Industrial Average after its results topped projections. Microsoft Corp. advanced 1% 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 US economy shows signs of recovering from a 2.9% contraction in the first quarter.
Reports on Thursday 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.
US 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% already saw a bubble, the quarterly survey of of 562 investors, analysts and traders who are Bloomberg subscribers. Almost one-third of respondents called the market for lower-rated corporate debt overheated and most said stock swings will increase within six months, the 15-16 July poll showed.
US Federal Reserve (Fed) chair Janet Yellen said on Wednesday 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 US labour market and inflation accelerating toward the central bank’s 2% 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 on Thursday in Owensboro, Kentucky. He doesn’t vote on monetary policy this year.
Yellen told lawmakers on Wednesday the central bank plans to press on with record easing to combat persistent weakness in the job market.
Stephen Kirkland, Eshe Nelson and Paul Dobson in London, Daryna Krasnolutska in Kiev, Joseph Ciolli, Susanne Walker and Callie Bost in New York, Lydia Mulvany in Chicago and Steve Matthews in Atlanta contributed to this story.