Global financial markets have turned gloomy as the countdown to the Federal Reserve’s probable interest-rate increase sparked a selloff among riskier assets, from equities to commodities and emerging currencies.
U.S. stocks headed for their worst week in a month, while shares in developing nations extended the longest slump since June amid speculation higher U.S. rates will trigger outflows. European stocks dropped to a two-month low and oil plunged below $36 a barrel on track for its worst week since March. Industrial metals rose amid plans to cut back output. Treasuries rallied with the yen on haven demand.
“Companies that are leveraged to commodities are breaking lower and then you also have flows of funds into the Treasury market because people are buying Treasuries in anticipation of inflation,” said Dave Lutz, the Annapolis, Maryland-based head of exchange-traded funds trading for JonesTrading Institutional Services. “You’ve got the double whammy in equities. That is going to be the big driver of the day.”
Volatility has returned to global financial markets just days before the Fed is anticipated to raise rates for the first time in more than a decade. With commodity prices at a 16-year low adding to concern that weakness in China’s economy will spread, investors are seeking havens on speculation that the change in central-bank policy will roil markets. Adding to investor anxiety Friday was news that Third Avenue Management took the unusual step of freezing withdrawals from a credit mutual fund.
The Standard & Poor’s 500 Index slumped 1.3% at 11:15 a.m. in New York, headed for a weekly slide of more than 3%. That’s the most since Nov. 13, when signs of slowing growth from China to Europe rekindled concern that weakness could spread to America.
The Chicago Board Options Volatility Index jumped 15% to 22.25, headed for a weekly surge of 50%, the most since August. The VIX trades at its highest level since September.
Traders are pricing in a 74% chance that the Fed will raise rates at its Dec. 16 meeting, with data out of the U.S. Friday showing growth in retail sales and producer prices for November.
DuPont Co. fell with Dow Chemical Co. after the two said they will merge in an all-stock deal, with Dow Chief Executive Officer Andrew Liveris becoming executive chairman. DuPont CEO Ed Breen will be CEO of the new company.
The Stoxx Europe 600 Index tumbled 1.9%, taking its weekly loss to 3.8%. All 19 industry groups declined, led by carmakers. The regional benchmark is heading for its lowest level since October and has sunk 7.5 in December amid a rout in commodity companies and disappointment over the European Central Bank’s last meeting.
Currencies of commodity-exporting nations slumped as oil and iron ore prices tumbled. Australia’s dollar extended its biggest weekly slide since September. South Africa’s rand fell to a record, breaching 16 per dollar for the first time, after President Jacob Zuma unexpectedly fired his finance minister earlier this week. Brazil’s real, Norway’s krone and Mexico’s peso also fell.
A gauge of 20 developing-nation currencies fell 0.7%, sliding 2% in the week, the worst performance since March. The ruble fell 0.6% on Friday. The currency stayed lower after the Bank of Russia kept interest rates on hold. Turkey’s lira dropped 1%.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, was little changed. It is up 0.3% since Dec. 4.
Investors who piled into the riskiest corners of the credit markets during seven years of rock-bottom interest rates are getting a reminder of how hard it can be to cash out. With outflows from U.S. high-yield bond funds running at the fastest pace in more than a year, Martin Whitman’s Third Avenue Management took the rare step of freezing withdrawals from a $788 million credit mutual fund on Dec. 9.
The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, rose 5.52 basis points to 502.88 basis points, approaching the highest level this year. BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, the largest fund of its kind, fell to the lowest levels since 2009.
U.S. 10-year yields fell six basis points to 2.17% on Friday, compared with 2.17% on Dec. 31, 2014. The yield on similar-maturity German bunds was at 0.56%.
From the U.S. to Greece to Japan, all major developed government bond markets are poised to finish 2015 with a gain even as the Fed prepares to raise interest rates.
All 26 markets tracked by Bloomberg are poised to generate positive returns this year. Greek bonds led the gains with an 18% rally after the nation received an international bailout. Treasuries advanced 1%. Government securities also rose in Japan, Germany and Switzerland, pushing yields on some maturities in those nations below zero. Emerging Markets
The MSCI Emerging Markets Index dropped 1.8%, heading for the lowest close since September. The gauge dropped 4.4% in the week, the biggest decline for the period in 2 1/2 months. Equity benchmarks in Hong Kong, Indonesia and South Africa lost at least 1.5% on Friday.
The Hang Seng China Enterprises Index sank 1.5%, its seventh day of losses and the Shanghai Composite Index slid 0.6% to a five-week low. More than 30 senior executives of listed Chinese companies have gone missing or faced government probes this year, according to the state-run Securities Times.
The yuan fell 0.27% in Shanghai, taking its five-day loss to 0.83%, on speculation China’s central bank is taking advantage of a stronger dollar to weaken the currency before the U.S. raises rates.
Oil headed for the biggest weekly decline since March amid speculation OPEC’s decision to effectively scrap production targets will keep the market oversupplied. The global oil surplus will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, the International Energy Agency said in a report released Friday. West Texas Intermediate crude dropped 0.9% to $36.43 a barrel.
Most industrial metals gained, with copper rallying the most two weeks, amid speculation that China’s state stockpiling agency planned to buy material, which would help soak up surplus supplies. Aluminum climbed for a third day after China’s smelters agreed not to expand capacity.
Copper had the most negative outlook in a Bloomberg commodities outlook survey, with 18 respondents saying they were bearish for 2016, while eight were bullish and four were neutral.
Iron ore fell 0.6% to $38.30 a ton, according to a price index compiled by Metal Bulletin.
–With assistance from Neil Denslow, Emma O’Brien, Lukanyo Mnyanda, Anna-Louise Jackson and Sridhar Natarajan.
— Check out Grantham: 12 Economic Facts to Ruin Investors’ 2016 on ThinkAdvisor.