Better-than-expected US economic data pushed the dollar to its highest level against the yen since July 2007. Stocks dropped against their recent three-week performance, while crude oil and gold fell. Anxiety continued as investors waited to see when and by how much the US Fed would raise interest rates, and whether this could damage the message sent out by the positive growth data. A German-based currency strategist outlined the overall feeling: “The dollar is the story.” Peter Wilhelm
By Stephen Kirkland & Jeremy Herron
(Bloomberg) — U.S. stocks dropped the most in three weeks while the dollar jumped after data from housing to manufacturing beat estimates, boosting the case for higher interest rates. Oil retreated with gold.
The Standard & Poor’s 500 Index lost 1.1 percent by mid-morning in New York, the biggest intraday slide since May 6. The Bloomberg Dollar Spot Index added 0.8 percent, with the greenback at the strongest versus the yen in nearly eight years. The difference between yields on Treasuries due in two and 30 years narrowed to the least in two weeks. Oil slumped 1.5 percent, while gold lost 1.4 percent.
Orders for capital equipment rose for a second month; sales of new homes climbed more than forecast; and a measure of regional manufacturing exceeded estimates. The reports add to evidence of a rebound in growth after a first-quarter slowdown and come after Federal Reserve Vice Chairman Stanley Fischer said rate increases will be driven by data. Chair Janet Yellen last week said that borrowing costs will rise this year.
“The looming Fed change is always out there,” Richard Sichel, chief investment officer at Philadelphia Trust Co, which oversees $2-billion, said by phone. “You have a couple of items that could be considered good, things are looking better, the dollar is strong — basically it’s working against the market at the moment.”
The S&P 500 slipped from an all-time high on Friday after Yellen said it would be “appropriate” to raise rates this year if the economy improves, although the pace of further increases will be gradual. Equity markets were closed Monday for the Memorial Day holiday.
The stocks benchmark traded last week in the tightest range in six months as investors weighed data showing strength in the labour market against continued signs of weakness in manufacturing. Equities have fluctuated near records on speculation the Fed won’t raise rates too soon or too quickly to snuff out economic growth.
Among stocks moving Tuesday, energy shares tumbled 1.1 percent, while materials producers lost 1.3 percent and led declines. Time Warner Cable Inc rallied 4.1 percent as Charter Communications Inc agreed to buy the company.
“The market is kind of striking this in-between, wanting better economic data; but then the flipside, meaning the Fed, is [all] that much sooner to raising rates,” said Walter Todd, who oversees about $1- billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital. “I’m fine with that, with seeing better economic data and dealing with the implications.”
The difference between two- and 30-year yields declined to 231 basis points, according to Bloomberg Bond Trader prices. It touched the lowest level since May 8.
The dollar strengthened versus all 16 of its major peers. The US currency added 0.9 percent to 122.64 yen and touched 122.69 yen, its highest level since July 2007. It added 0.7 percent to $1.0899 per euro, taking this year’s gain versus the 19-nation shared currency to 11 percent.
“The dominant thing is the dollar story,” said Esther Reichelt, a currency strategist at Commerzbank AG in Frankfurt. Fed policymakers “know that low rates are not without risk. They fear that if they wait too long they’ll have to hike faster in order to prevent overheating.”
The euro dropped to its lowest level in a month against the dollar, while German government bonds rose the most in a week. Euro-area markets are on tenterhooks as Greece’s Syriza-led administration seeks bailout loans, The nation’s Finance Minister Yanis Varoufakis blamed creditors’ insistence on more austerity for the lack of a deal that would release debt funds.
Germany’s 10-year bund yield declined three basis points to 0.57 percent, while Greece’s jumped 55 basis points to 11.92 percent. The Stoxx Europe 600 was little changed as an advance in travel shares offset a drop in energy producers. The MSCI Emerging Markets Index dropped 0.3 percent and a Bloomberg gauge of 20 currencies fell 0.4 percent to a one-month low.
Gold dropped to $1,188.60 an ounce, the lowest in two weeks, as prospects for US interest rate increase helped to push the dollar to a one-month high, curbing demand for the metal. Silver and platinum declined.
Brent crude futures fell 2.1 percent to $64.13 a barrel in London after rising Monday for the third time in four days as investors weighed flaring Middle East violence against signs that a global oil glut will persist.
