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U.S. Stocks Sink With Emerging Currencies After Fed Taper

By Whitney Kisling and Susanne Walker
January 29, 2014 4:36 PM EST 8 Comments
Turkish Lira
Turkish Lira

U.S. stocks fell, pushing the Standard & Poor’s 500 Index to a two-month low, while Treasuries and the yen gained as the Federal Reserve said it would make further cuts to economic stimulus and as emerging-market currencies weakened. Gold and natural gas climbed.

The S&P 500 slumped 1 percent to 1,774.20 by 4:34 p.m. in New York, the lowest close since Nov. 12 after European stocks retreated. Facebook Inc. (FB) rose after market on better-than-estimated earnings. Ten-year Treasury yields dropped seven basis points and the yen gained 0.7 percent. Russia’s ruble slipped to a record versus its dollar-euro basket, while South Africa’s rand sank 2.1 percent. Gold futures rose the most in a week while natural gas contracts jumped to a four-year high.

The Fed said it will trim its monthly bond buying by another $10 billion to $65 billion, sticking to its plan for a gradual withdrawal from outgoing Chairman Ben S. Bernanke’s unprecedented easing policy. Turkey doubling its key interest rate and South Africa unexpectedly increasing borrowing costs failed to assuage concern over emerging markets and a slowdown in China, where a private report tomorrow may firm signs that manufacturing is contracting in Asia’s largest economy.

“You’ve got all these problems with the fundamentals of a whole bunch of emerging markets,” Brian Barish, president of Denver-based Cambiar Investors LLC, which manages $9 billion, said in a phone interview. “When you have this sort of thing happening, where the selling is indiscriminate, you recognize this is a wave. You let it crash over you. You need to just let it happen and not get fixated on trying to trade around it.”

Rate Rises

The Fed left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that the unemployment rate falls below 6.5 percent, “especially if projected inflation” remains below the committee’s longer-term goal of 2 percent.

Fed policy makers pressed on with a reduction in the purchases intended to speed the U.S. economy’s recovery from the worst recession since the Great Depression, even after payroll growth slowed in December and amid the rout in emerging-market currencies. While some officials have expressed concern that the Fed’s record $4.1 trillion balance sheet could create asset bubbles it was the first meeting with no dissent since June 2011.

Three rounds of U.S. monetary stimulus helped the S&P 500 rise as much as 173 percent from a 12-year low in 2009.

Turkey and South Africa’s actions on rates followed central banks from India to Brazil also tightening monetary policy to bolster their currencies.

‘Little Twitchy’

All but eight of 24 developing-nation currencies tracked by Bloomberg weakened today, with the rand, Hungarian forint, Mexican peso and Brazilian real leading declines. The South Africa Reserve Bank unexpectedly raised the repurchase rate to 5.5 percent from 5 percent today, following Turkey’s decision to increase its one-week repo rate to 10 percent from 4.5 percent at a late-night emergency meeting.

“There was a sense that Turkey, by hiking interest rates, had resolved the lira pressure and by extension would provide comfort to other emerging markets,” said Daragh Maher, a currency strategist at HSBC Holdings Plc in London. “But now the market is a little twitchy that there are still grounds to be nervous regarding emerging markets.”

The ruble weakened 1.1 percent to 40.9038 against the dollar-euro basket used by Bank Rossii to smooth swings in the currency, the weakest level ever on a closing basis. Russia’s central bank may have spent about $2.8 billion to slow the decline today, according to Dmitry Dorofeev, a money manager at BCS Financial Group in Moscow. That would be the biggest intervention since Sept. 2011, according to Bank Rossii data.

Kiwi Slips

The yen advanced against all but one of its 16 major peers and gained 0.8 percent versus the euro after two days of declines.

New Zealand’s dollar, known as the kiwi, slipped as much as 1 percent after the central bank kept its official cash rate at an all-time low of 2.5 percent. Reserve Bank of New Zealand Governor Graeme Wheeler said policy makers expect to start an “adjustment” of interest rates soon and that there was a need for borrowing costs to be returned to “more-normal levels.”

U.S. stocks sank as earnings forecasts from Yahoo! Inc. and AT&T Inc. disappointed investors. Yahoo slumped 8.7 percent as its sales outlook signaled slowing growth for the Internet company. Boeing Co. retreated 5.3 percent and AT&T lost 1.2 percent after forecasts trailed some analysts’ estimates. The Dow Jones Industrial Average (INDU) slipped 1.2 percent for its weakest close since Nov. 7.

VIX Rises

Facebook climbed more than 6 percent in extended trading after the world’s largest social network posted revenue that exceeded analysts’ estimates as mobile-advertising sales surpassed desktop promotions for the first time.

The Chicago Board Options Exchange Volatility Index jumped 9.8 percent today to 17.4. The gauge of S&P 500 options known as the VIX has gained 27 percent this year.

Yields on 10-year Treasury notes fell to 2.68 percent, the lowest level on a closing basis in two months. The Treasury will sell its first issue of floating-rate notes before a Fed policy announcement projected to include further cuts to bond purchases.

“It’s the fear trade,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The lira gave up its gains this morning. It’s the panic that this is going to become a contagion. Guys are buying Treasuries on the back of that.”

European Moves

The Stoxx Europe 600 Index slipped 0.6 percent.

Mulberry Group Plc slumped 27 percent after the British luxury-handbag maker said earnings will be “substantially below” estimates. Fiat SpA (F) lost 4.9 percent after the automaker that bought full control of Chrysler last week forecast 2014 profit that trailed analysts’ estimates.

The MSCI Asia Pacific Index added 1.8 percent as Japanese stocks surged, while the MSCI Emerging Markets Index rose 0.3 percent in a second day of gains. The gauge slumped 2.3 percent amid last week’s emerging-market rout, the most since November.

Mark Mobius, chairman of Templeton Emerging Markets Group, said inflows into developing nations will resume later this year following a selloff triggered by the Fed deciding to start tapering monetary stimulus last month. Russian shares had their longest losing streak since April and the Borsa Istanbul 100 Index of Turkish shares slumped 2.3 percent today.

Commodity Markets

Gold futures climbed 0.9 percent to settle at $1,262.20 an ounce amid demand for safe-haven investments after the Fed’s statement. West Texas Intermediate crude oil closed little changed at $97.36 a barrel.

Natural gas surged on the last day of February futures trading on speculation that a government report tomorrow will show a bigger-than-normal inventory drop as frigid weather eroded supplies. Futures jumped as much as 13 percent to $5.71 per million British thermal units, the highest intraday price since Jan. 26, 2010.

The S&P GSCI index of raw materials prices climbed a second day, adding 0.5 percent to the highest level on a closing basis this year.

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

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

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