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U.S. Stocks Fluctuate With Treasuries on Fed Comments; Oil Drops

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U.S. stocks fluctuated as investors weighed better-than-estimated bank earnings and economic data against Federal Reserve comments that some sectors have excessive valuations. Treasuries were little changed and the dollar strengthened as Chair Janet Yellen told lawmakers the central bank must press on with stimulus.

The Standard & Poor’s 500 Index fell 0.1% at 1:50 p.m. in New York. The Russell 2000 Index of small companies sank 0.8% 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 1.2% after the banks reported better-than- forecast earnings. U.S. crude fell below $100 a barrel for the first time since May. The yield on 10-year Treasury notes fell one basis point to 2.54, 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 labor markets and inflation is still below the Fed’s goal, Yellen said in semi-annual remarks before Congress. Retail sales data today showed a broad-based increase in June, which probably helped the U.S. economy rebound in the second quarter. JPMorgan Chase said second-quarter profit beat estimates and Goldman Sachs reported a surprise increase in earnings.

“There was a short-term reaction there to that comment and the markets pretty much digested it,” Walter “Bucky” Hellwig, a Birmingham, Alabama-based senior vice president at BB&T Wealth Management, said in a phone interview. “What it did is throw some cold water on some of the better earnings reports that were out earlier and had the markets on a roll. For a long-side investor it was disappointing that she had to use those terms specifically.”

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 program, even as it saw improvements in the economy and labor market.

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

Yellen cited labor-market weaknesses even after an unexpectedly fast decline in unemployment put pressure on Fed officials to consider accelerating their timetable for an interest-rate increase. 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.

Substantially Stretched

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

The Dow Jones Internet Composite Index slid 0.6%. The gauge had rallied 15% from a low on May 8 to erase its losses for the year before falling 3.2% last week. The barometer surged 54% in 2013.

Pandora Media Inc., which trades at more than 160 times projected earnings, fell 1%. Facebook Inc. and TripAdvisor Inc., which rallied more than 98% in 2013, lost at least 1.1%.

The Nasdaq Biotechnology Index slid 1.7%, after falling 3.2% last week, the most since April 11. It had rallied as much as 23% since a low that month.

The Standard & Poor’s Smallcap 600 Index trades at 26 times reported profit and the Nasdaq biotechnology index has a multiple of more than 500, according to data compiled by Bloomberg. The broader S&P 500 has a price-earnings ratio of 18, the highest level since 2010.

Rate Sensitivity

“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.’’

The Fed report overshadowed data today showing U.S. 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% yesterday, the most since July 3, 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.

Bank Earnings

JPMorgan Chase climbed 3.9% and Goldman Sachs rose 1.2% to lead an index of banks to the biggest advance among 24 groups 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 U.S. bank, posted second-quarter profit last week that rose 3.8% on lower credit costs, while Citigroup Inc. said yesterday 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 U.S. lender by assets, is scheduled to report results tomorrow.

Lorillard Inc. dropped 8.2% after Reynolds American Inc. reached an agreement to buy its rival for $27.4 billion including debt. Reynolds lost 5.1%.

Banco Espirito

The Stoxx Europe 600 Index sank 0.4% after yesterday 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 Santo SA sank 20% to the lowest level in data going back to 1993. The bank’s subordinated bonds also tumbled as 847 million euros ($1.15 billion) of short-term debt sold by a company linked to the Portuguese lender falls due today.

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

Currency Moves

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 U.K. 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 101.657 yen after climbing the most yesterday since July 3. The U.S. currency rose 0.4% to $1.35685, the strongest since June.

The MSCI Emerging Markets Index rose 0.3%, 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 tomorrow, 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 selloff 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 July 8 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 yesterday and wheat declined 0.5%. Seventy-six percent of corn and 72 percent of soybeans were in good or excellent condition as of July 13, the best shape for that time of year since 1994, U.S. Department of Agriculture data released yesterday show.

West Texas Intermediate oil fell 1.3% to $99.61 a barrel in New York. Futures slid amid signs of a recovery in Libyan exports, stable output in Iraq and the highest U.S. crude production in almost three decades.

–With assistance from Callie Bost and Jacob Barach in New York.

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