Small caps tumble

July 7, 2014 07:33 AM

U.S. stocks dropped from a record, led by declines in small-cap companies, as analysts brought forward estimates for the Federal Reserve to raise interest rates. Commodities slumped as oil and metals retreated.

The Standard & Poor’s 500 Index slipped 0.5% at 11:24 a.m. in New York. The Russell 2000 Index tumbled 1.3%, the most since May. The Stoxx Europe 600 Index slid 0.6% after rising 1.8% last week. The yield on Treasury three-year notes climbed one basis point while 10-year rates dropped two points. Emerging-market stocks advanced as Indonesian stocks gained the most since April. The S&P GSCI index of 24 commodities slumped 0.9%, as silver (COMEX:SIN14) lost 0.8% and U.S. natural gas (NYMEX:NGN14) erased 3.6%.

Goldman Sachs Group Inc. revised its forecast for the Federal Reserve to raise rates to the third quarter of 2015, rather than the first three months of 2016, saying the economy is “accelerating to an above-trend pace.” Minutes of the last U.S. policy meeting are due this week and Alcoa Inc. is set to release earnings. American markets resume today from a three-day weekend after stronger-than-forecast employment data on July 3.

“Valuations are pretty stretched, and we don’t see a lot of revenue growth, which might be negative for the market,” Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion, said in a phone interview. “There may be some concern about earnings, but this is basically a market being driven by an improving economy and guarantees by the Federal Reserve that they’re not going to raise interest rates.”

Goldman joins companies including JPMorgan Chase & Co. and Bank of Tokyo-Mitsubishi UFJ Ltd. in moving up its Fed estimates after U.S. data last week showed the economy added 288,000 workers in June, compared with the 215,000 projected by a Bloomberg News survey of analysts.

Target Rate

Fed policy makers have kept their target for overnight lending between banks in a range of zero to 0.25% since December 2008. Traders see about a 72% chance officials will raise the key rate from near zero by September 2015, fed funds futures show. That’s up from 56% at the end of May.

Fed Chair Janet Yellen said on July 2 that concerns about financial stability shouldn’t prompt a change in current policy. Three rounds of monetary stimulus from the Fed and better than- forecast corporate earnings have driven the S&P 500 up more than 190% from its March 2009 bottom. The central bank will publish the minutes of its June 17-18 meeting on July 9.

IMF Forecast

International Monetary Fund Managing Director Christine Lagarde signaled a cut in the institution’s global expansion forecasts, saying yesterday that investment is still weak and risks remain in the U.S. even as its rebound accelerates. The IMF is preparing to update its economic forecasts this month after predicting April 8 that the global economy will expand 3.6% this year and 3.9% in 2015.

Both the S&P 500 and the Dow Jones Industrial Average advanced 1.3% last week, with the 30-stock gauge closing above 17,000 for the first time. The S&P 500 is trading at 16.7 times the projected earnings of its members, higher than the five-year average multiple of 14.3.

Alcoa will unofficially open the second-quarter earnings- reporting season tomorrow. Profit at companies in the S&P 500 increased 5% in the three months through June, estimates compiled by Bloomberg show.

GT Advanced Technologies Inc. sank 13% today after Canaccord Genuity Group Inc. downgraded the stock to hold from buy. King Digital Entertainment Plc added 4% as Piper Jaffray Cos. advised investors to buy shares in the creator of the Candy Crush Saga video game. 

Europe Shares

More than seven shares declined for every one that advanced in the Stoxx 600, with trading volumes 18% below the 30-day average, data compiled by Bloomberg show.

Sky Deutschland AG fell 3.9% after Nomura Holdings Inc. lowered its rating on the company controlled by Rupert Murdoch’s 21st Century Fox Inc. Deutsche Boerse AG slid 3.1% after Credit Suisse Group AG recommended selling shares of the operator of the Frankfurt Stock Exchange.

PostNL NV rallied 18% after the Dutch mail service boosted its annual profit forecast. Tele2 AB and TeliaSonera AB climbed at least 1.9% after the Swedish company agreed to buy Tele2’s Norwegian business.

The MSCI Emerging Markets Index added 0.1%, heading for the highest close in 16 months.

Russia’s Micex index jumped 1.6%, rebounding from the steepest decline in a week on July 4, as the country urged a renewal of peace talks after Ukrainian forces recaptured rebel strongholds. The Ukrainian Equities Index advanced 1.7%.

Indonesia Election

Indonesia’s main stock index climbed 1.7% on speculation Jakarta’s governor Joko Widodo will beat Prabowo Subianto for the top office. The rupiah gained 1.4%. Presidential candidates traded barbs over corruption and vested interests in a televised debate before the world’s fourth-most populated country goes to the polls on July 9.

Yields on Treasury 10-year securities fell three basis points to 2.62%.

The dollar (NYBOT:DXU14) was little changed at $1.3598 per euro (CME:E6U14) after advancing to $1.3576, the strongest level since June 26. The U.S. currency slipped 0.2% to 101.84 yen.

Gold (COMEX:GCN14) dropped 0.4% to $1,315.10 an ounce and silver futures tumbled 0.8%. Copper slipped 0.7%.

U.S. natural gas fell on plentiful supplies. West Texas Intermediate oil (NYMEX:CLN14) lost 0.8% from the close on July 3 to $103.27 a barrel, the seventh consecutive drop and the longest slump since December 2009.

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