Search

U.S. Stocks Fall as Small Caps Tumble, Commodities Drop

By Joseph Ciolli and Susanne Walker
July 07, 2014 4:03 PM EDT 24 Comments
Christine Lagarde, managing director of the International Monetary Fund. Lagarde signaled a cut in the institution’s global expansion forecasts, saying investment is still weak and that risks remain in the U.S. even as its rebound accelerates.
Photographer: Chris Ratcliffe/Bloomberg
Christine Lagarde, managing director of the International Monetary Fund. Lagarde signaled a cut in the institution’s global expansion forecasts, saying investment is still weak and that risks remain in the U.S. even as its rebound accelerates.

U.S. stocks dropped from a record, with small-cap companies tumbling the most in two months, as analysts brought forward estimates for the Federal Reserve to raise interest rates. Commodities slumped as natural gas and metals retreated.

The Standard & Poor’s 500 Index slipped 0.4 percent at 4 p.m. in New York. The Russell 2000 Index tumbled 1.8 percent, the most since April 25. The Stoxx Europe 600 Index slid 0.9 percent after rising 1.8 percent last week. The yield on Treasury three-year notes climbed one basis point while 10-year rates dropped three points. Emerging-market stocks advanced as Indonesian stocks gained the most since April. The S&P GSCI index of 24 commodities slumped 0.9 percent, as silver lost 0.6 percent and U.S. natural gas erased 4.1 percent.

Goldman Sachs Group Inc. revised its forecast for the Federal Reserve to raise rates to the third quarter of 2015, rather than the first three months of 2016, saying the economy is “accelerating to an above-trend pace.” Minutes of the last U.S. policy meeting are due this week and Alcoa Inc. is set to release earnings. American markets resumed from a three-day weekend after stronger-than-forecast employment data on July 3.

“Rates are going to go up before people expect,” Tom Stringfellow, president and chief investment officer of San Antonio-based Frost Investment Advisors LLC, which manages about $10 billion, said in a phone interview. “And when rates do go up, I expect some sort of a knee-jerk reaction. But I don’t believe for a moment that the Fed’s going to raise rates at a speed that derails this stable environment.”

Goldman joins companies including JPMorgan Chase & Co. and Bank of Tokyo-Mitsubishi UFJ Ltd. in moving up its Fed estimates after U.S. data last week showed the economy added 288,000 workers in June, compared with the 215,000 projected by a Bloomberg News survey of analysts.

Target Rate

Fed policy makers have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. Traders see about a 72 percent chance officials will raise the key rate from near zero by September 2015, fed funds futures show. That’s up from 56 percent at the end of May.

Fed Chair Janet Yellen said on July 2 that concerns about financial stability shouldn’t prompt a change in current policy. The central bank will publish the minutes of its June 17-18 meeting on July 9.

The yield on the five-year note reached almost the highest level since April before trading little changed. The three-year yield rose one basis point to 0.97 percent and the 10-year yield fell three basis points to 2.62 percent after rising 10 basis points last week.

Most Sensitive

“The five-year-and-in part of the curve will be the most sensitive,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The front end is weaker in anticipation of what the minutes may say -- maybe they may come off a bit hawkish.” The yield curve refers to differences in yields between different maturities.

International Monetary Fund Managing Director Christine Lagarde signaled a cut in the institution’s global expansion forecasts, saying yesterday that investment is still weak and risks remain in the U.S. even as its rebound accelerates. The IMF is preparing to update its economic forecasts this month after predicting April 8 that the global economy will expand 3.6 percent this year and 3.9 percent in 2015.

Both the S&P 500 and the Dow Jones Industrial Average (INDU) advanced 1.3 percent last week, with the 30-stock gauge closing above 17,000 for the first time. The Russell 2000 last week recovered nearly all its losses from a two-month selloff of Internet and small-cap shares, coming within a point of an all-time high.

Stretched Valuations

Three rounds of monetary stimulus from the Fed and better than-forecast corporate earnings have driven the S&P 500 up more than 190 percent from its March 2009 bottom. The S&P 500 is trading at 16.7 times the projected earnings of its members, higher than the five-year average multiple of 14.3.

“Valuations are pretty stretched, and we don’t see a lot of revenue growth, which might be negative for the market,” Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion, said in a phone interview. “There may be some concern about earnings, but this is basically a market being driven by an improving economy and guarantees by the Federal Reserve that they’re not going to raise interest rates.”

Alcoa will unofficially open the second-quarter earnings-reporting season tomorrow. Profit at companies in the S&P 500 increased 5 percent in the three months through June, estimates compiled by Bloomberg show.

European Stocks

The Stoxx 600 lost the most since June 25. More than seven shares declined for every one that advanced, with trading volumes 19 percent below the 30-day average, data compiled by Bloomberg show.

Sky Deutschland AG fell 4.1 percent after Nomura Holdings Inc. lowered its rating on the company controlled by Rupert Murdoch’s 21st Century Fox Inc. Deutsche Boerse AG slid 2.9 percent after Credit Suisse Group AG recommended selling shares of the operator of the Frankfurt Stock Exchange.

PostNL NV rallied 19 percent after the Dutch mail service boosted its annual profit forecast. Tele2 AB and TeliaSonera AB climbed at least 1.8 percent after the Swedish company agreed to buy Tele2’s Norwegian business.

The MSCI Emerging Markets Index added 0.2 percent to the highest level in 16 months.

Russia’s Micex index jumped 1.6 percent, rebounding from the steepest decline in a week on July 4, as the country urged a renewal of peace talks after Ukrainian forces recaptured rebel strongholds. The Ukrainian Equities Index advanced 1.7 percent.

Indonesia Elections

Indonesia’s main stock index climbed 1.7 percent on speculation Jakarta’s governor Joko Widodo will beat Prabowo Subianto for the top office. The rupiah gained 1.6 percent. Presidential candidates traded barbs over corruption and vested interests in a televised debate before the world’s fourth-most populated country goes to the polls on July 9.

The dollar was little changed at $1.3605 per euro. The U.S. currency slipped 0.2 percent to 101.84 yen.

Gold dropped 0.3 percent to $1,317 an ounce and silver futures fell 0.6 percent. Copper slipped 0.6 percent, the first decline in five session, amid signs of increased supply.

U.S. natural gas fell to an almost six-month low on speculation that inconsistent heat may limit demand for the fuel. West Texas Intermediate oil lost 0.5 percent to $103.53 a barrel, the seventh consecutive drop and the longest slump since December 2009, as Libya prepared to increase exports.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Stuart Wallace at swallace6@bloomberg.net; Lynn Thomasson at lthomasson@bloomberg.net Jeff Sutherland

Comments
More related content »