US stocks fall, bonds fluctuate on Janet Yellen remarks; oil drops

New York: US stocks fell as the Federal Reserve said it sees some sectors with excessive valuations. Treasuries fluctuated and the dollar strengthened as chair Janet Yellen told lawmakers the central bank must press on with stimulus. Oil slid.

The Standard & Poor’s 500 Index fell 0.4% at 11:57 am in New York. The Russell 2000 Index of small companies sank 1.3% after a Fed report said valuations of some biotechnology and social media stocks may be substantially stretched. JPMorgan Chase & Co. and Goldman Sachs Group Inc. rose at least 0.8% after the banks reported better-than- estimated earnings. US crude fell below $100 a barrel for the first time since May. The yield on 10-year treasury notes was little changed near the lowest in six weeks. The dollar gained against most major peers.

“The central bank must press on with stimulus as significant slack remains in labour markets and inflation is still below the Fed’s goal,” Yellen said in semi-annual remarks before Congress. Retail sales data on Tuesday showed a broad-based increase in June, which probably helped the US economy rebound in the second quarter. JPMorgan Chase said second-quarter profit beat estimates and Goldman Sachs reported a surprise increase in earnings.

“The Fed wants to pay attention to valuations given that they might have to change the interest rate backdrop that has been a strong catalyst for the market,” Eric Teal, who helps oversee about $3.6 billion as the chief investment officer at First Citizens BancShares Inc. in Raleigh, North Carolina, said by phone. “The small cap area is going to be much more interest rate sensitive.”

Senate Address

Yellen repeated her comments from last month that the Fed will keep interest rates low for a considerable time after ending its asset-purchase programme, even as it saw improvements in the economy and labour market.

“A high degree of monetary policy accommodation remains appropriate,” Yellen said on Tuesday. “Although the economy continues to improve, the recovery is not yet complete.”

Minutes from the Fed’s June meeting, released last week, showed some policy makers were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking.

Valuation metrics in some sectors do appear substantially stretched, particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year, the Fed said on Tuesday in a separate report.

The Dow Jones Internet Composite Index slumped 0.6% and the Nasdaq Biotechnology Index lost 1.5%.

Small-caps and Internet shares were the biggest victims of a market retreat earlier this year as investors dumped the bull market’s best performers amid concern valuations advanced too far. The Russell 2000 climbed back from a low in May to within a point of its all-time high on 3 July. Selling in Internet and biotech shares resumed last week, sending the small-cap index to a loss of 4%, its biggest decline in two years.

The Fed report overshadowed data on Tuesday showing the US retail sales rose 0.2% in June after a 0.5% advance in May that was larger than previously reported. The New York Fed’s Empire manufacturing report unexpectedly rose to 25.6 for this month from 19.28 last month.

The S&P 500 climbed 0.5% on Monday, the most since 3 July, to rebound from its worst week since April. Profit at S&P 500 companies probably rose 4.5% in the three months through June while sales advanced 3.1%, analyst estimates compiled by Bloomberg show.

JPMorgan Chase climbed 3.9% and Goldman Sachs rose 0.8% to lead an index of banks to the biggest advance in the S&P 500. Both firms reported fixed-income revenue that topped estimates. Banks have seen profits hurt in recent quarters as the Fed slows its bond buying and fixed-income clients make fewer bets amid low volatility.

Wells Fargo & Co., the most valuable US bank, posted second-quarter profit last week that rose 3.8% on lower credit costs, while Citigroup Inc. said on Monday that net income fell 96% as the company agreed to pay $7 billion to resolve a mortgage-related probe. Bank of America Corp., the second-biggest US lender by assets, is scheduled to report results on Wednesday.

Lorillard Inc. dropped 7.3% after Reynolds American Inc. reached an agreement to buy its rival for $27.4 billion including debt. Reynolds lost 3.4%.

The Stoxx Europe 600 Index sank 0.4% after Monday rallying the most in a week. Software AG declined 19% after the German company lowered its operating-margin forecast, dragging technology companies down for the second-biggest decline among 19 industry groups. Draegerwerk AG slumped 16% after the German maker of medical equipment cut its projection for sales growth.

Banco Espirito

Banco Espirito Santo SA sank 20% to the lowest level in data going back to 1993. The bank’s subordinated bonds also tumbled as €847 million ($1.15 billion) of short-term debt sold by a company linked to the Portuguese lender falls due on Tuesday.

Rioforte Investments SA, a holding company of the troubled Espirito Santo group, owes the money to Portugal Telecom SGPS SA, according to a 30 June regulatory filing by the nation’s biggest phone company.

Britain’s pound advanced 0.4% to $1.715 and added 0.7% to 79.16 pence per euro. The Office for National Statistics said annualized UK inflation was at 1.9% in June from 1.5% the prior month. That compares with 1.6% forecast by analysts in a Bloomberg survey.

The dollar rose 0.1% to ¥101.65 after climbing the most on Monday since 3 July. The US currency rose 0.3% to $1.3577 per euro after touching $1.3562, strongest since 18 June.

The MSCI Emerging Markets Index rose 0.2%, heading for the highest close since March 2013. South Korea’s Kospi index jumped 0.9%, advancing for a second day, as exporters gained.

China reports second-quarter gross domestic product (GDP) on Wednesday, with analysts expecting a 7.4% expansion from a year earlier. June retail sales and industrial production are also due.

Dubai stocks rose, sending the benchmark index back into a bull market three weeks after a sell-off ended the longest rally since 2005, as investors bet Arabtec Holding Co. will keep state backing. The DFM General Index climbed 3.4%.

The won slid 0.9% versus the dollar. Incoming finance minister Choi Kyung Hwan said in a 8 July nomination hearing that exchange rate stability is important, raising the prospect of intervention after the won gained the most among major currencies in the second quarter.

Corn dropped after rebounding from a four-year low on Monday and wheat declined 0.5%. Seventy-six percent of corn and 72% of soybeans were in good or excellent condition as of 13 July, the best shape for that time of year since 1994, US department of agriculture data released on Monday show.

West Texas Intermediate oil fell 1.8% to $99.09 a barrel in New York. Futures slid amid signs of a recovery in Libyan exports, stable output in Iraq and the highest US crude production in almost three decades. Bloomberg

Shelley Smith, Paul Dobson, Stephen Kirkland, Cecile Vannucci, Namitha Jagadeesh and Claudia Carpenter in London, Nick Gentle in Hong Kong and Callie Bost in New York also contributed to this story.