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U.S. Stocks Fall as Oil Prices Rally Amid Iraq Tension

By Oliver Renick and Mark Shenk
June 12, 2014 4:20 PM EDT 46 Comments

U.S. stocks retreated, with the Standard & Poor’s 500 Index falling the most in three weeks, as industrial and consumer-discretionary shares plunged after escalating violence in Iraq sent oil to an eight-month high while economic data missed estimates.

Delta Air Lines Inc. fell the most in the benchmark index and United Continental Holdings Inc. plunged 5.9 percent to lead industrial stocks lower. The Dow Jones Transportation Average retreated the most in two months as oil prices rose to an eight-month high. Diamond Offshore Drilling Inc. and Noble Corp. climbed at least 3.2 percent as oil and gas companies rallied. Intel Corp. jumped 3.8 percent in extended trading after boosting its full-year revenue target.

The S&P 500 fell 0.7 percent to 1,930.11 at 4 p.m. in New York, giving the index its longest losing streak in two months. The Dow Jones Industrial Average slid 109.69 points, or 0.7 percent, to 16,734.19. The Nasdaq Composite Index lost 0.8 percent, the most in a month.

“This is a major geopolitical event for the oil market,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Iraq had been a bright spot ramping up production and now we’re in the midst of a very ugly conflict.”

A surge in violence across northern and central Iraq, three years after U.S. troops withdrew, has raised the prospect of a return to sectarian civil war in OPEC’s second-biggest oil producer. Iraqi forces sought to check the rapid advance of Islamist militants who had seized major cities, as Prime Minister Nouri al-Maliki responded to the greatest threat to his government since taking power. President Barack Obama said he won’t rule out using airstrikes to assist Iraq’s government.

Data Watch

The S&P 500 lost 0.4 percent yesterday and the Dow average halted a five-day rally as the World Bank cut its forecast for global growth and investors weighed equity valuations. The broader index trades at 16.4 times forecast earnings, up from a multiple of 14.8 at the beginning of February. The gauge had closed at a record for four straight sessions through June 10.

Retail sales rose 0.3 percent in May as American consumers took a respite following a three-month surge in shopping. The gain followed a revised 0.5 percent gain in April that was much larger than previously estimated, Commerce Department figures showed. The median forecast of 83 economists surveyed by Bloomberg called for a 0.6 percent advance.

A separate report indicated applications for unemployment benefits in the U.S. rose to 317,000 last week. The median forecast of 52 economists surveyed by Bloomberg called for 310,000. Claims have averaged around 324,000 so far in 2014.

Clear Blue

“There is some indication that the economy continues to move forward in a fairly measured fashion,” Rob Lutts, chief investment officer at Salem, Massachusetts-based Cabot Money Management Inc., said in a phone interview. He oversees $600 million of assets. “I think this perpetuates the worry that investors have today. What they want is that clear blue sky economic condition, and we don’t have that.”

The S&P 500 (SPX) advanced 7.1 percent through yesterday since a low on April 11 as data showed the U.S. economy is recovering from the impact of extreme weather earlier this year. The Federal Reserve is watching the labor market as it moves to complete a monthly stimulus program late this year. Three rounds of bond buying have helped propel the S&P 500 higher by as much as 188 percent from its bear-market low in March 2009.

The Chicago Board Options Exchange Volatility Index rose 8.1 percent to 12.54, a three-week high. The gauge, known as the VIX, trades at the highest since May 15 on a closing basis.

Airlines, Oil

Eight of the 10 main S&P 500 groups retreated, with industrial and consumer-discretionary stocks losing 1.3 percent to pace declines. Caterpillar Inc. dropped 1.9 percent and Disney Co. fell 1.8 percent.

The Dow Jones Transportation Average (TRAN) sank 2 percent, the most since April, as West Texas Intermediate crude jumped 2 percent, the most since Sept. 18. Delta sank 5.4 percent, the most since August, while United Continental lost 5.9 percent and Southwest Airlines Co. dropped 4.5 percent.

Energy producers in the S&P 500 added 0.3 percent. Noble, a contract-drilling company, rallied 3.1 percent, and Diamond Offshore jumped 3.3 percent to pace gains. Chevron Corp. climbed 0.7 percent, the most in the Dow.

Lululemon Athletica Inc. (LULU) declined 16 percent to $37.25, the lowest since March 2011. The athletics-apparel retailer forecast full-year earnings of as much as $1.76 a share, down from an earlier prediction of as much as $1.90. The forecast also fell short of analyst estimates calling for $1.89.

Keurig Green Mountain Inc. advanced 4.1 percent to $120.75 for the biggest gain in the S&P 500. The company said yesterday it is “committed” to returning more cash to investors.

Restoration Hardware (RH) Holdings Inc. rallied 13 percent to a record $80.40. The home-furnishings chain boosted its forecast for full-year profit to at least $2.24 a share, after predicting in March no more than $2.22. Analysts estimate earnings will be $2.21. The Corte Madera, California-based company also raised its outlook for revenue.

Intel added jumped 3.8 percent to $29.01 in extended trading after closing little changed in the regular session. The world’s largest computer-chipmaker raised its forecast for second-quarter revenue as demand for corporate personal computers picks up.

To contact the reporters on this story: Oliver Renick in New York at orenick2@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeremy Herron, Alan Soughley

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