Equities rebound despite increased violence

U.S. stocks fluctuated after equities posted their first weekly drop in a month as investors weighed growing unrest in Iraq and an International Monetary Fund report saying the Federal Reserve may be able to keep rates lower for longer.

The Standard & Poor’s 500 (CME:SPM14) rose 0.1% to 1,937.62 at 9:41 a.m. in New York. The Dow Jones Industrial Average slid 11.67 points, or 0.1%, to 16,764.07.

“It’s uncertainty of warfare erupting that’s keeping the markets on edge this morning,” Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said by phone. “The central problem for the markets as a whole is that we’re still trying to find some good news that justifies markets at current valuation levels.”

The IMF cut its growth forecast for the U.S. economy this year and said the Federal Reserve may have scope to keep interest rates at zero for longer than investors expect.

The Washington-based IMF now sees the world’s largest economy growing 2% this year, down from an April estimate of 2.8%. The IMF left a 2015 prediction unchanged at 3%, and said it doesn’t expect the U.S. to see full employment until the end of 2017, amid low inflation.

For the Fed, the forecast means “policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets,” the fund said in its annual assessment of the U.S. economy.

Iraq Tension

The S&P 500 dropped 0.7% last week, snapping a three-week rally that had pushed equities to all-time highs, as Sunni insurgents in Iraq occupied more territory and oil prices jumped to an eight-month high.

Iraq’s army killed more than 279 rebels yesterday as the prospect of civil war in OPEC’s second-largest producer intensified with Sunni Muslim insurgents controlling territory north of Baghdad. West Texas Intermediate crude pared gains after Bank of America Corp. said the complete halt of Iraqi output, concentrated at the opposite end of the country, is “highly unlikely.”

Ukraine said Russia cut natural gas (NYMEX:NGN14) supplies after demanding fuel payments be made in advance, the first time shipments have been affected in this year’s crisis in relations between the two countries. Tensions escalated at the weekend with 49 servicemen killed when pro-Russia fighters shot down an aircraft.

In the U.S., data showed industrial production climbed more than forecast in May, a sign gains in manufacturing are supporting growth as the U.S. economy picks up. Output at factories, mines and utilities rose 0.6% after a revised 0.3% drop in April that was smaller than previously estimated, a report from the Fed showed.

The New York Fed’s Empire manufacturing report rose to 19.28, exceeding the average estimate of 15 in a Bloomberg survey of economists, a separate report indicated.

The Fed is watching economic data as it moves to complete a monthly stimulus program late this year. Policy makers meet this week, with a decision on rates and bond buying due June 18. The stimulus has helped propel the S&P 500 higher by as much as 188% from its bear-market low in March 2009.

Investors also considered equity valuations after the S&P 500 closed at an all-time high on June 9. The measure trades at 16.4 times the projected earnings of its members as of June 13, up from a multiple of 14.8 at the start of February. The Dow closed at a record on June 10.

A measure of volatility posted the biggest gain since April last week, rebounding from a seven-year low on June 6, as the Chicago Board Options Exchange Volatility Index surged 14% to 12.18.

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