Europe Stocks Fall as Crude Climbs; S&P 500 Futures Rise

Frankfurt (Aug 8)  Stocks fell in Europe and Asia while bonds rose as President Barack Obama’s authorization of air strikes in Iraq boosted demand for haven assets. Oil climbed and U.S. equity-index futures gained, erasing earlier declines.

The Stoxx Europe 600 Index fell 0.5 percent at 8 a.m. in New York. Standard & Poor’s 500 Index futures added 0.2 percent, erasing earlier declines and signaling the gauge will trim this week’s losses. German 10-year yields tumbled as much as four basis points to 1.02 percent and the rate on similar-maturity Treasury notes dropped to the least in more than a year. Brent crude climbed 0.5 percent.

More than $1.8 trillion has been erased from the value of equities worldwide in the past two weeks amid a deepening crisis in Iraq, renewed rocket attacks on Israel and escalating trade war with Russia over its actions in Ukraine. Obama said the U.S. will strike Islamic State militants if they move toward the Kurdish city of Erbil, where the U.S. has diplomatic personnel.

“This just adds another geopolitical tension to a market that’s already surrounded in uncertainty, with Israel, Ukraine, and now Iraq,” said Francois Savary, chief investment officer at Reyl & Cie. in Geneva. “The big question is whether this will provoke a slowdown in global economic activity, or even a recession, to the extent that you have to reassess the recovery. That’s impacting investors’ reasoning.”

U.S. equity-index futures rebounded after RIA reported Russia is making efforts to de-escalate the Ukraine conflict. RIA cited Russian Security Council head Nikolai Patrushev. The S&P 500 has dropped 0.8 percent this week, headed for its first back-to-back weekly losses since May.

Haven Demand

The escalation in U.S. involvement in Iraq comes as the Islamic State, the extremist group that’s conquered swaths of northern Iraq since June, extended its advance by seizing the Mosul Dam, the country’s largest. Israeli aircraft pounded the Gaza Strip today after militants fired rockets into the country’s south, shattering a cease-fire.

The U.S. 10-year yield fell two basis points to 2.39 percent and touched 2.35 percent, the lowest since June 2013. The advance in Germany’s 10-year bonds left yields lower for a fifth week, the longest run since June 2012. Borrowing costs also fell to record lows from France to Finland amid a surge in the euro area’s higher-rated government bonds.

Funds that buy U.S. junk bonds suffered their biggest withdrawal on record as the first monthly loss for the securities in almost a year.

Stocks Slide

“There’s a flight to quality,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas SA, whose New York unit is one of the 22 primary dealers that trade with the U.S. central bank. “Tension is rising globally. Since the start of the month, equity markets are off sharply and bonds are rallying. That should continue.”

All 19 industry groups in the Stoxx 600 declined, with trading volumes 29 percent greater than the 30-day average, data compiled by Bloomberg show.

“Obama’s action shows the U.S. inevitably needs to be involved in the Middle East,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd. “That’s causing a risk-off mode and may weigh on the global economy because it can disrupt supply and demand of oil.”

Bad Loans

Banca Monte dei Paschi di Siena SpA sank 6.4 percent after the Italian lender increased its provisions for bad loans and reported a wider-than-projected loss. Tod’s SpA tumbled 11 percent after the luxury-good maker’s first-half sales and profit missed projections. Nokian Renkaat Oyj retreated 6.9 percent after the Finnish tiremaker reported a slump in Russian revenue and posted quarterly profit that missed estimates.

The MSCI Emerging Markets Index retreated 0.4 percent, extending this week’s decline to 1.2 percent. Benchmark gauges in Poland, India, South Korea, Malaysia and the Philippines lost at least 1 percent today.

Russia’s Micex climbed 1.9 percent, rebounding from a three-month low as energy stocks advanced. The ruble gained less than 0.1 percent, erasing earlier declines.

Iraq’s 2028 Eurobond fell for an eighth day, the longest losing streak since a 13-day slump ended July 18. The yield jumped 15 basis points to 7.57 percent, the highest since February. The yield has climbed 37 basis points this week.

China Exports

The Shanghai Composite Index rose 0.3 percent after export growth unexpectedly accelerated. The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong dropped 0.4 percent, for a 1.4 percent weekly decline. China Vanke Co., the country’s biggest developer, tumbled 6.1 percent in Hong Kong after becoming eligible for short selling today.

Investors pulled a record $7.1 billion of junk bonds from funds in the week ended Aug. 6, accelerating a flight that started last month and bringing net outflows to $9.75 billion this year, according to data provider Lipper. The exodus followed a 1.3 percent loss for U.S. junk bonds in July, the first monthly decline since last August, according to Bank of America Merrill Lynch index data.

Brent rose to $106 a barrel and West Texas Intermediate oil climbed 0.4 percent to $97.72 a barrel. Conflict in Iraq has so far spared production in the south, home to about three-quarters of its crude output.

Gold rose 0.2 percent after climbing as much as 0.8 percent to a three-week high of $1,322.76 an ounce.

Source: Bloomberg