Stocks drop on U.S. government shutdown as yen, Treasuries gain

Technical Watch

U.S. stocks may reach a new high before dropping by as much as 4% in the next four to five weeks, as the S&P 500 forms a rising wedge, according to technical analysts at UBS AG.

While the S&P 500 doesn’t show any bearish divergence in trading indicators such as the NYSE McClellan Oscillator, which measures the moving average of net advancing shares in a market, or the number of stocks above their 20-day moving average, the index may reach another high by mid-October, before falling, Michael Riesner and Marc Mueller wrote in a note dated Oct. 1.

The Stoxx Europe 600 Index fell 0.7% for the third decline in four days.

Hochtief AG slumped 7.9% after the Sydney Morning Herald reported allegations of corruption at the company’s Australian business. KappAhl AB dropped 9.8% after the clothing retailer proposed paying no dividend this financial year. Portugal Telecom SGPS SA jumped 6.5%, the most in almost four months, after agreeing to merge with Brazil’s Oi SA to form a network operator with 100 million subscribers.

Emerging Markets

The MSCI Emerging Markets Index added 0.2%, a second straight gain. The Philippine Composite Index jumped 2.7% after the Asian Development Bank raised its economic growth forecast for the country, while gauges in Russia and Turkey fell more than 1%. Markets in India and China were shut for holidays.

Gold futures jumped 2.4% to $1,317.40 an ounce, the first gain in three days, and silver surged 2.8% to $21.78 an ounce. West Texas Intermediate oil added 1.8% to $103.83 a barrel after TransCanada Corp. said it expects to complete work on the southern portion of its Keystone pipeline expansion by the end of October.

The 10-year Treasury yield slid as low as 2.59, within one basis point of the lowest level since Aug. 12. The yield is down from the high this year of 3.005% on Sept. 6 and compares with the average of 3.53% over the past decade.

Treasury market volatility increased by the most in six weeks yesterday. Price swings as measured by the Merrill Lynch Option Volatility Estimate Index jumped 9% as the gauge advanced for a fifth day, the longest run of increases in four weeks. The index was at 87.37, versus the average of 69 for the past year.

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