Commodity contagion: it's not just crude

January 14, 2015 09:58 AM

U.S. stocks fell, while bonds rallied around the world as a deepening commodities rout and an unexpected drop in American retail sales fueled concern growth is slowing. Copper sank the most since 2011 and the yen rose.

The Standard & Poor’s 500 Index slid 0.8% at 9:32 a.m. in New York, poised for a fourth day of losses. JPMorgan Chase & Co. and Wells Fargo & Co. declined after reporting results. The Stoxx Europe 600 Index fell 1.3%. Copper tumbled 4.9%. The Bloomberg Commodity Index lost 0.5 percent. The yen rose versus its 16 major peers. Ten-year Treasury yields fell to the least since May 2013, while 30-year rates touched a record low.

Retail sales fell last month in a broad-based retreat that will probably prompt economists to cut growth forecasts. Commodity prices are tumbling as a supply glut collides with waning demand, reducing earnings prospects for producers and increasing the appeal of bonds as inflation slows. The World Bank cut its global growth outlook, citing weak expansions in Europe and China.

“The decline in commodity prices has been a little bit faster than people expected,” Patrick Spencer, head of U.S. equity sales at Robert W. Baird & Co. said by phone from London. “That’s caught them a bit off guard and that’s kicked off concerns about world growth.”

U.S. retail sales dropped 0.9% in December, the biggest slide since January 2014, following a 0.4% gain in November that was smaller than previously estimated, according to the Commerce Department.

Treasuries, Copper

Selling is picking up heading into a U.S. earnings season that has seen analysts cut estimates at the fastest rate since the bull market began. Profit is forecast to have grown 2% in the final three months of 2014 and increase 2.8% for the current quarter, down from analysts’ October estimates of 8.1% and 9.2%, respectively.

“The retail sales number is a little surprising, but not when you look at what’s happening with wage growth,” Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion, said in a phone interview. “The only way you get increase consumer spending is when wages are going up, and they’re not doing that. You’re not going to have any organic growth or retail sales unless you get wage gains.”

Data last week showed the U.S. jobless rate fell to the lowest level since June 2008, while the average hourly earnings for all employees dropped by 0.2%, the biggest since comparable records began in 2006.

Bank Earnings

JPMorgan, the biggest U.S. bank, said fourth-quarter profit fell 6.6%, as the sale of a commodities unit pushed fixed-income revenue lower. Wells Fargo & Co., meanwhile, said fourth-quarter profit rose 1.8% as a strengthening U.S. economy boosted lending. The shares slumped 0.6%.

“The news hasn’t been as rosy as hoped so far,” James Gaul, a portfolio manager at Boston Advisors LLC, which oversees $2.8 billion, said by phone. “Economic data has been fair -- certainly not bad but not great. There’s a little bit of worry going into earnings season. We were at a point where the market was a little bit ahead of itself.”

American bonds have climbed this month as stocks dropped and Federal Reserve policy makers said they will take a measured approach to raising interest rates. The long bond has returned 5.6 percent this year, according to Bank of America Merrill Lynch Index data, while the Standard and Poor’s 500 Index of stocks has lost 1.7%.

Page 1 of 3
About the Author