(Bloomberg) — U.S. stocks fell as oil’s plunge beyond $27 a barrel sent global equities to near bear market territory, fueling demand for haven assets.
The Standard & Poor’s 500 Index ended Wednesday down 1.2 percent at a 21-month low, while the Dow Jones Industrial Average pulled back from its steepest intraday slump since August to shed 249 points by the close. American crude tumbled 6.7 percent to its lowest settlement since May 2003 after Royal Dutch Shell Plc predicted a drop in fourth-quarter profit amid the global oil glut.
Ten-year Treasuries advanced for the fifth time in six sessions, as gold jumped more than 1 percent and Japan’s yen resumed its climb.
“Everybody has been perched on the edge of their chair waiting to see a capitulation day, in which you get a really steep flush in equities,” said Mark Luschini, chief investment strategist in Philadelphia at Janney, which oversees about $68 billion. “That’s usually indicative of a point where a market may stage a reversal, and we had that today.”
MSCI Inc.’s gauge of global equities fell to a level 19 percent below its May record, clawing back from the precipice of a what most investors regard as a bear market. Emerging-market shares declined 3 percent, while Russia’s ruble and the Mexican peso tumbled to record lows versus the greenback. Yields on 10-year Treasury notes dropped below 2 percent and the yen jumped to a one-year high.
“There are a lot of things behind” the selloff, Stephen Schwarzman, chief executive officer of Blackstone Group LP, said in an interview Wednesday with Bloomberg TV’s Erik Schatzker from Davos, Switzerland. “You have economic things such as the slowing of the U.S. economy which has been pretty gradual. You’ve got energy going down so quickly that you can almost get windburn. You’ve got China as an issue which is is probably overdone. So when you put those factors together you have an unattractive brew along with the concern the Federal Reserve will raise rates and slow the economy further.”
Equities markets buffeted by everything from concerns over China’s slowdown to the selloff in oil and rising U.S. interest rates are off to their worst start to a year on record, at the same time as the Federal Reserve and other central banks signal they’ll maintain a higher threshold before providing relief.
The rout in the oil patch is rippling through financial markets amid growing signs that credit quality is worsening. U.S. bonds are now indicating the slowest inflation since May 2009 as investors pile into haven assets.
The MSCI All-Country World Index fell 2 percent as of 4 p.m. in New York, bringing its drop this year to 11 percent. The index tumbled more than 3 percent earlier in the day, and for most of the session was poised to close in a bear market.
The S&P 500 slipped to 1,859.33, paring a slide of as much as 3.7 percent that was the steepest since the height of the market’s August selloff. The index closed at its lowest level since April 2014, and is now down 9 percent this year.
Energy shares fell 2.9 percent, pulling back from a tumble of more than 6 percent. Indexes of chipmakers and consumer- durables producers climbed as investors bought shares of some of the most shorted companies.
The S&P 500’s plunge triggered a technical signal that indicates it’s oversold. The gauge’s relative strength index, which measures whether gains or losses have been too fast to sustain, dipped below 30 on Wednesday, a threshold that indicates a rebound may materialize. The RSI last fell below 30 on Jan. 13. The prior time it was that low was on Aug. 25, when the S&P 500 hit a bottom and rallied 6.5 percent over the next three days.
“We were oversold and we didn’t keep falling off the table,” said Walter “Bucky” Hellwig, who helps manage $17 billion as a senior vice president at BB&T Wealth Management in Birmingham, Alabama. “The last-hour strength is positive and I think it’s due to the fact that investors are saying, ‘this thing is oversold, I’m going to put some money to work.”
The equities selloff had lowered valuation metrics, leaving the S&P 500 trading at 14.9 times the forecast earnings of its members, in line with the index’s average over the past five years. It’s still more expensive than developed markets in Europe, where the Stoxx 600 Index trades for 13.8 times estimated earnings.
Investors are keeping close watch on progress in the American economy as the markets tumble. Data today showed the cost of living in the U.S. dropped in December, led by a slump in commodities. A separate report showed new-home construction unexpectedly fell last month, indicating the industry lost some momentum entering 2016.
See also: 10 financial predictions for 2016
While U.S. equities recouped some of their losses, crude settled near its lowest level of the day. West Texas Intermediate tumbled the most in more than four months as oil executives turned gloomier on the prospect of a recovery this year. Futures fell 6.7 percent to the lowest since May 2003, settling at $26.55 a barrel on the New York Mercantile Exchange.
Markets could “drown in oversupply,” sending prices even lower as growth in oil demand slows and Iran boosts exports, the International Energy Agency said Tuesday. A “lower-for-even- longer” scenario is forcing companies’ budget planners to trim spending even further.
Mining stocks plumbed a 12-year low and industrial metals resumed their slide on prospects for slower economic growth in China and sustained low oil prices. Copper fell as much as 1.4 percent in London. The Bloomberg World Mining Index dropped as much as 3.3 percent to its lowest level since September 2003, with the world’s biggest mining company, BHP Billiton Ltd., sliding 7.4 percent in London.
Gold rose 1.3 percent in the spot market, to $1,101.73 an ounce, as renewed losses in equities spurred demand for less risky assets. Citigroup Inc. said the idea of bullion being a haven was now back in vogue and prices may be supported over the first quarter.
The MSCI Emerging Markets Index dropped the most in more than two weeks, leaving it down 13 percent this year, its worst start since records began in 1988. Shares in Argentina slid more than 6 percent and those in Hungary were down 4.7 percent.
The ruble weakened as much as 5 percent to a record 82.4690 against the dollar. The Mexican peso fell to an all-time low of 18.6762 per dollar and is down 7 percent this year, making it Latin America’s worst performing major currency.
The yen strengthened 0.6 percent to 116.92 per dollar, and touched 115.98, its strongest level since Jan. 16, 2015. The currency appreciated 0.8 percent to 127.35 per euro, while the euro was little changed at $1.0891.
The Canadian dollar strengthened for the first time this year after the Bank of Canada kept their benchmark interest rate unchanged and said stronger U.S. demand, a weaker currency and last year’s monetary easing are helping the economy weather a slump caused by the retreat in oil prices.
Treasuries climbed, pushing 10-year yields to the lowest level since October, as investors sought the safety of sovereign debt. The benchmark 10-year note yield fell seven basis points, or 0.07 percentage point, to 1.99 percent, according to Bloomberg Bond Trader data.
The risk premium on the Markit CDX North American Investment Grade Yield Index, a credit-default swaps benchmark tied to the debt of 100 of the safest companies, surged to 112.47 basis points, the most in more than three years. The premium on the Markit CDX North American High Yield Index, rose to 569 basis points, the highest mark since 2012.
“You can’t try to dance through this minefield, you just have to stay on the sidelines in Treasuries,” said Jim Vogel, head of interest-rate strategy at FTN Financial Capital Markets in Memphis, Tennessee. “There are dents in the U.S. economy that are getting harder to paper over.”
– With assistance from Cordell Eddings, Joseph Ciolli, Oliver Renick, Mark Shenk, Anna-Louise Jackson and Emma O’Brien.