Stocks recover on Wall Street after 2-day plunge

Specialist Joseph Mastrolia, left, and trader George Ettinger work on the floor of the New York Stock Exchange, Friday, June 21, 2013. U.S. stocks rose in morning trading on Friday as traders regrouped following the biggest drop of the year. (AP Photo/Richard Drew)

Specialist Joseph Mastrolia, left, and trader George Ettinger work on the floor of the New York Stock Exchange, Friday, June 21, 2013. U.S. stocks rose in morning trading on Friday as traders regrouped following the biggest drop of the year. (AP Photo/Richard Drew)

Trader Vincent Quinones, left, works on the floor of the New York Stock Exchange, Friday, June 21, 2013. U.S. stocks rose in morning trading on Friday as traders regrouped following the biggest drop of the year. (AP Photo/Richard Drew)

Trader Edward McCarthy, left, works on the floor of the New York Stock Exchange, Friday, June 21, 2013. U.S. stocks rose in morning trading on Friday as traders regrouped following the biggest drop of the year. (AP Photo/Richard Drew)

Trader Peter Tuchman, foreground left, works on the floor of the New York Stock Exchange, Friday, June 21, 2013. U.S. stocks rose in morning trading on Friday as traders regrouped following the biggest drop of the year. (AP Photo/Richard Drew)

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U.S. stocks were mostly higher on Friday, a sharp contrast to the plunge they took earlier this week.

The Dow Jones industrial average was up 26 points at 14,785 as of 1:42 p.m. Eastern Daylight Time. That almost seemed like a rally after the Dow’s 560-point tumble over Wednesday and Thursday, which wiped out its gains from May and June. The plunge came just three weeks after the Dow hit a record high of 15,409.

The Fed’s easy money policies have been a big driver behind the stock market’s bull run the last four years. It led to low interest rates that encouraged borrowing for everything from factory machinery to commercial airplanes to home renovations. Now investors have to figure out where to put their money now that they have a better idea of how the Fed’s stimulus efforts could end.

Kim Forrest, senior analyst with Fort Pitt Capital Group, a portfolio management firm in Pittsburgh, said the market had the “right reaction” to the news that the Fed would wind down its stimulus if the economy continues to improve, but the move may have been overblown.

“We’re getting news that made the market uncomfortable,” she said. “We shouldn’t be sitting at these highs given the fact that the Fed signaled that someday it’s going to take some liquidity off the table. So the reaction is right, the magnitude is probably a little off.”

The Standard & Poor’s 500 index rose three points to 1,591. The S&P hit its own record high a month ago. The S&P and Dow were moving between slight gains and losses Friday.

The yield on the 10-year Treasury note hit 2.49 percent, up from 2.42 percent late Thursday. It has risen sharply since Wednesday as investors sold bonds in anticipation that the Fed would slow, and eventually end, its bond purchases, if the U.S. recovery continues. The Fed has said it wouldn’t hesitate to step up its bond purchases again if the economy weakens.

The yield, which is a benchmark for interest rates on many kinds of loans including home mortgages, is at its highest level since August 2011. On Tuesday, the day before the Fed’s announcement, it was 2.19 percent. It hit a low for the year of 1.63 percent on May 3.

Technology shares lagged the market after business software maker Oracle reported disappointing earnings late Thursday. Oracle plunged $ 2.71, or 8 percent, to $ 30.50, the biggest drop in the S&P 500 index. Oracle is struggling to adapt as customers shift away from software installed on their own computers toward software that runs remotely.

Oracle’s results are a poor omen for business spending on technology. Technology stocks in the S&P index fell 1.8 percent, the second-biggest decline among the 10 industry groups in the index. The biggest declines were in materials stocks, down 2 percent.

The Nasdaq composite index, which is heavily weighted with technology stocks, fell 14 points, or 0.4 percent, to 3,350. Apple, the biggest stock in the index, fell $ 3.84, or 1 percent, to $ 412.99. Microsoft fell 10 cents, or 0.3 percent, to $ 33.39.

The price of gold recovered after plunging the day before. Gold was up $ 6.30, or 0.5 percent, to $ 1,292.50 an ounce. Crude oil fell $ 1.90, or 2 percent, to $ 93.24 a barrel in New York.

The dollar rose against other currencies as traders anticipated that U.S. interest rates would rise as the Fed winds down its bond purchases.

Among other stocks making big moves:

—Darden Restaurants, which runs Olive Garden and Red Lobster, fell $ 1.97, or 3.8 percent, to $ 49.26 after rising expenses hurt its fourth-quarter earnings.

— Spreadtrum Communications jumped $ 3.98, or 18 percent, after the Chinese smartphone chip maker said its board is considering a buyout offer valued at about $ 1.39 billion from Tsinghua Holdings.

— Facebook rose 36 cents, or 1.5 percent, to $ 24.27 after the company said it would add video to its popular photo-sharing app Instagram, following in the heels of Twitter’s growing video-sharing app, Vine.

A Fed policy statement and comments from Fed Chairman Ben Bernanke started the selling in stocks, bonds and commodities Wednesday. Bernanke said the Fed expects to scale back its bond-buying program later this year and end it by mid-2014 if the economy continues to improve. The bank has been buying $ 85 billion a month in Treasury and mortgage bonds, which has made borrowing cheap for consumers and businesses. The program has also encouraged investors to buy stocks instead of bonds.

The S&P 500 is still up 11.6 percent, for the year, not far from its full-year increase of 13.4 percent last year.

Overseas, Japan’s Nikkei index rose 1.7 percent, but other Asian markets fell. European markets slipped. France’s CAC-40 fell 1.1 percent and Germany’s DAX fell 1.8 percent.

The real question will be whether the sell-off continues next week, said Frank Fantozzi, CEO of Planned Financial Services. So far, it’s more of an adjustment. “If the flow out of equities starts to increase, this might be the pullback we’ve been waiting for,” he said.

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Stocks recover on Wall Street after 2-day plunge

Fierce Selloff in Emerging Market Currencies; India Intervenes to Stop Plunge in Rupee; Brazil Steps Up Real Intervention; Root Cause of Crisis

I’s hard not to laugh at the irony of recent central bank currency actions.

• After complaining for years about the strength of the Real, the Brazilian central bank stepped up intervention actions hoping to stop a plunge in the currency.


• Turkey now attempts to attract capital after taking measures for the past four years to stop the flow of money into the country.


• In India, the central bank seeks to stop a plunge in the Rupee which is at a record low of record low 58.95 to the dollar.

The Wall Street Journal reports Emerging-Market Currencies See Turnaround After Hefty Losses

The South African rand and other emerging-market currencies reversed course to gain against the dollar Tuesday after suffering heavy losses earlier in the session.

These currencies have plummeted rapidly in June, dragged down by expectations the Federal Reserve will taper its bond-buying program later this year. Ultra-accommodative U.S. monetary policy had helped drive investors to seek higher yields in emerging markets in recent years, analysts say.

India’s central bank dove into foreign exchange markets Tuesday to stop the rupee’s slide at a record low of INR58.95 to the dollar. Pressured to attract capital to the country, a top Indian economic official promised a new round of measures to allow foreign investment in currently restricted parts of the economy. The rupee pared losses against the dollar but still fell 0.3% on the day to trade at INR58.34 per dollar.

Turkey’s central bank on Tuesday announced new measures to attract capital after spending much of the past four years trying to stop too much money from flooding into its economy. That helped to stem the lira’s fall to near a multi-year low against the dollar as police moved in on protesters in Istanbul. Turkey’s capital measures echoed Brazil’s move earlier this month to eliminate a 6% tax on foreigners’ bond investments.

Brazil’s central bank stepped up intervention in the face of the rapid currency depreciation that began on May 28, with a series of foreign exchange swap auctions, including two on Tuesday.

Emerging Market Assets Suffer in Fierce Sell-Off

The Financial Times reports Emerging market assets suffer in fierce sell-off.

Emerging market currencies, stocks and bonds suffered a fierce sell-off on Tuesday on rising investor concerns over the prospect of the US Federal Reserve reining in its programme of bond-buying to drive down long-term interest rates.

The South African rand and the Brazilian real touched four-year lows against the US dollar on Tuesday, and the Indian rupee fell to a record low. Even relatively robust countries like the Philippines and Mexico – long favourites of investors – have been hit by a spate of selling.

The FTSE Emerging Markets index fell 1.7 per cent on Tuesday, taking its decline since its May peak to more than 10 per cent. Shares in Brazil – one of the four big emerging markets – closed 3 per cent in São Paulo on Tuesday. That pulled Brazilian shares into bear market territory – a drop of more than 20 per cent from a peak this year.

Both international and local currency emerging market bonds have been pummelled, sending borrowing costs higher.

Benoit Anne, a senior strategist at Société Générale, said central bank money had arguably inflated a bubble in emerging markets, which was now unravelling as investors priced in a change in Fed policy. “This will not be a short-lived sell-off,” he predicted.

Emerging market fund managers have also been hit by investor redemptions. Asset managers that focus on international bonds last week suffered the biggest investor withdrawal since mid-2007, according to EPFR. Emerging market equity funds were hit with the biggest redemptions since 2011. 

Cause of the Selloff

Both the Financial Times and the Wall Street Journal pinned the blame on the possibility the Fed would stop its QE programs later this year.

I rather doubt that is the cause, and I also doubt the Fed is going to stop QE any time soon.

Instead, I propose this is what happens when bubbles burst. And a huge part of numerous bubbles was widespread belief the growth in China and India will last forever. Hot money plowed into emerging market countries and also commodity producing countries.

Australia is another casualty of the coming bust of China. For details please see Australian Dollar Plunges as Home Loans Dive; Australia Insolvencies Hit Record; Worst is Yet to Come.

To be sure insane amounts of liquidity fueled various bubbles in stocks, in bonds, in emerging markets, but with the global economy rapidly slowing, and with much of Europe in an outright economic depression, the Fed is not that likely to curtail QE soon.

If the Fed does slow QE, it will not be because the US economy is strengthening, but rather realization by the Fed (not admitted of course) that various stock and bond market bubbles pose serious economic risks if allowed to grow bigger.

Root Cause of Crisis

By the way, all this extremely volatile currency action, as well as various equity and bond market bubbles, can be pinned entirely on central banks, fractional reserve lending, and lack of a gold standard.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com 

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mish’s Global Economic Trend Analysis

Fierce Selloff in Emerging Market Currencies; India Intervenes to Stop Plunge in Rupee; Brazil Steps Up Real Intervention; Root Cause of Crisis

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