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S&P 500 Rebounds While Emerging Stocks Extend Worst Start

By Stephen Kirkland and Lu Wang
February 04, 2014 4:31 PM EST 17 Comments
An electronic stock board displaying the day's movements of the Topix index outside a securities firm in Tokyo.
Photographer: Yuriko Nakao/Bloomberg
An electronic stock board displaying the day's movements of the Topix index outside a securities firm in Tokyo.

U.S. stocks rose, with the Standard & Poor’s 500 Index (SPX) rebounding following the biggest drop since June, as Treasuries retreated and Turkey’s lira led gains among emerging-market currencies. A gauge of stocks in developing nations extended its worst-ever start to a year.

The S&P 500 added 0.8 percent after sinking yesterday to a three-month low. Ten-year Treasury yields climbed five basis points by 4:29 p.m. in New York to 2.63 percent. The lira and South African rand strengthened at least 1.7 percent against the dollar and Australia’s currency jumped more than 2 percent. The MSCI Emerging Markets Index lost 0.8 percent, bringing its 2014 drop to 8.3 percent, the most since at least 1988. Japan’s Topix Index fell 4.8 percent, entering a correction with Hong Kong’s Hang Seng Index. Natural gas rallied more than 9 percent.

About $2.9 trillion has been erased from the value of equities worldwide this year, following the biggest rally in four years in 2013, as China’s growth slows, the Federal Reserve cuts stimulus and anti-government protests spread in emerging markets from Thailand to Ukraine. Yum! Brands Inc. (YUM) helped lead the rally in the U.S. today as the restaurant company joined 78 percent of S&P 500 companies in beating analysts’ earnings estimates so far this reporting season.

“Main Street is still chugging along,” Ethan Anderson, senior portfolio manager at Rehmann Financial in Grand Rapids, Michigan, said in a phone interview. His firm oversees $1.5 billion. “Earnings have been fine. You put all these together and I’m just not seeing anything that’s suggesting that the train is off the track. We’re pretty much in a very healthy pullback. To me, it’s refreshing. I’m right now in the buying opportunity camp.”

Fund Flows

Global investors pulled $6.3 billion from developing-nation equities in the week through Jan. 29, the biggest outflow since August 2011, according to Barclays Plc, citing data from research firm EPFR Global.

Volatility worldwide has jumped. The Nikkei Stock Average Volatility Index climbed 9.8 percent today to its highest level since July and the HSI Volatility Index of Hong Kong share swings soared 21 percent, the steepest surge since 2011.

Europe’s VStoxx Index slipped 4.2 percent after gaining 10 percent yesterday. In the U.S., the Chicago Board Options Exchange Volatility Index lost 11 percent after jumping 16 percent yesterday to its highest level since December 2012. Demand for protection amid the selloff has led to record trading of contracts on the gauge, which is often used as a hedge because it rises when stocks fall.

“What we are seeing right now is a lot of money exiting the emerging markets,” Sergio Ermotti, chief executive officer of UBS AG, said in Zurich on Bloomberg Television’s “Countdown.” “Short term, it looks a little bit overdone.”

Slowing Growth

The S&P 500 lost 5.8 percent through yesterday from its Jan. 15 record amid signs of a slowdown in Chinese expansion and after the Argentinian government’s decision to devalue the peso triggered a rout in emerging-market currencies. The Fed last week decided to press on with reductions in its monthly bond-buying program.

Three rounds of Fed asset purchases have helped drive the S&P 500 up as much as 173 percent from a 12-year low reached in 2009 while pushing capital into emerging markets in search of higher returns. The S&P 500 surged 30 percent last year, sending valuations to near the highest levels since 2009.

Richmond Fed President Jeffrey Lacker and Charles Evans, head of the Chicago Fed, signaled today that recent declines in global stock markets probably won’t deter policy makers from making further cuts to bond buying.

Among stocks moving today, Yum! climbed as much as 9.7 percent for its intraday biggest gain since 2008. Michael Kors Holdings Ltd. rallied 17 percent as the luxury-goods maker increased its profit and sales forecasts. Take-Two Interactive Software Inc. slumped 9.7 percent after its earnings projection trailed analysts’ estimates.

Narrowing Deficit

The U.S. will this year post the narrowest budget deficit as a share of the economy since 2007 as stronger growth helps boost tax revenue. The deficit will decline to $514 billion this fiscal year from $680 billion in 2013 before surging to $1.074 trillion in a decade, according to the Congressional Budget Office.

A stronger economy, lower unemployment, higher tax revenue and payments from mortgage-finance companies Fannie Mae and Freddie Mac are helping the U.S. narrow the gap from the 2009 record shortfall of $1.4 trillion.

Government data today showed U.S. factory orders declined 1.5 percent in December, after data yesterday showed manufacturing expanded at the weakest pace in eight months. Economists were forecasting a decline of 1.8 percent, according to the median estimate in a Bloomberg survey.

Some 25 companies on the S&P 500 report quarterly results today. Profit for member stocks probably increased by 8.3 percent in the fourth quarter of 2013 and revenue may have risen 2.5 percent, analysts’ estimates compiled by Bloomberg show. Adjusted earnings per share have risen 9.6 percent for the 276 companies that have reported so far in the season.

Emerging Markets

In emerging markets, the Hang Seng China Enterprises Index of mainland Chinese companies listed in Hong Kong lost 3.1 percent, the most since July 3, as trading resumed following the Lunar New Year holiday. Benchmark gauges in South Korea, South Africa, Malaysia and the Philippines fell more than 1 percent. The ruble climbed for the first time in three days against the dollar, advancing 1.2 percent.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the pace of Chinese economic growth is among the biggest questions in developing nations and one of the greatest risks for financial markets.

‘Mystery Meat’

“I call China the mystery meat of emerging-market countries,” Gross said during an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “Nobody knows what’s there and there’s a little bit of bologna, so we’re just going to have to wonder going forward through this year as to the potential problems in China and other emerging markets.”

Russia canceled a bond auction for the second consecutive week after the emerging-market rout sent yields on the nation’s bonds maturing in January 2028 to record highs.

The Stoxx Europe 600 Index slipped 0.2 percent today and is down 5.5 percent from a six-year high reached Jan. 22. Trading volumes were 25 percent above the 30-day average today, according to data compiled by Bloomberg.

Vestas Wind Systems A/S lost 4.8 percent after the world’s biggest wind-turbine manufacturer said it seeks to raise capital. ARM Holdings Plc, the semiconductor designer whose products power Apple Inc.’s iPhone and iPad, fell 5.9 percent after reporting quarterly earnings. UBS AG, Switzerland’s biggest bank, rose 5.4 percent after reporting fourth-quarter profit that beat analysts’ estimates.

Aussie Jumps

European government bonds were little changed. Germany’s 10-year yield was at 1.65 percent after touching a six-month low of 1.63 percent. Britain’s 10-year yield was at 2.70 percent, up one basis point.

Australia’s dollar, known as the Aussie, jumped the most since June after the central bank held benchmark interest rates at a record low in line with expectations. A period of stability in interest rates is the most prudent course at the moment, the Reserve Bank said, identifying reasonable prospects for a pickup in global growth.

The dollar weakened against 11 of 16 major peers and 21 of 24 emerging-market currencies tracked by Bloomberg. The U.S. currency gained 0.7 percent to 101.65 yen and was little changed at $1.3514 per euro.

U.S. natural gas jumped 9.6 percent as a winter storm spread across the U.S. Northeast, boosting demand for the heating fuel. Sugar, wheat and crude oil also rose at least 0.8 percent to help lead the S&P GSCI Index of commodities up 0.7 percent.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net

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

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