China reality check halts stock rally

Global stocks dropped as a slump in Chinese exports dragged metals lower and brought equities' five-day winning streak to a halt. Japanese government bonds surged in a haven-asset rally that also lifted the yen, gold and Treasuries. The Standard & Poor's 500 Index fell for the first time this month, while European equities slipped from a five-week high as investors sold equities that led a three-week rally. Industrial metals sank and iron ore fell as Goldman Sachs Group Inc. predicted gains in commodities would falter. A jump in Japanese bonds that sent yields to record lows helped boost Treasuries and European debt. The yen strengthened against all of its 31 major peers and gold climbed to a 13-month high. http://www.investmentnews.com/wp-content/uploads/assets/graphics src="/wp-content/uploads2016/05/CI10422538.JPG" Sustained demand for precious metals and sovereign debt highlights a lack of confidence in the rebounds in global stocks and commodities that took hold over the last three weeks, a period in which $4.6 trillion was added to the value of equities worldwide. Now data are starting to reinforce those misgivings: Japan announced a drop in fourth-quarter gross domestic product and China reported the biggest tumble in exports in almost six years. That may raise tension before a decision on further stimulus by the European Central Bank on March 10. “The Chinese trade data is a reminder that the path for the business cycle ahead is pretty rocky and bumpy,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “After such a rebound some profit taking is natural, especially with no real strong re-acceleration.” STOCKS The S&P 500 slipped 0.8% at 10:04 a.m. in New York, halting a five-day rally that pushed the index to a two-month high. Energy shares in the gauge have rallied 14% since Feb. 11, when the broader benchmark began a three-week rally of more than 9%. Banks, among the weakest during the worst-ever start to a year for U.S. stocks, have rallied 13% in that time. “Right now we're digesting this steady move up we've had that hasn't really had a bout of risk-off considering it was a huge bounce off the bottom,” Yousef Abbasi, global market strategist at JonesTrading Institutional Services LLC in New York, said by phone. “It would be nice to see some stability and digestion ahead of the big central bank catalysts this week. A lot of people are looking out to the ECB and one comment from Draghi could bring us into risk-off.” The Stoxx Europe 600 Index retreated 0.6%, led by mining-related companies. Gains in those sectors had helped the Stoxx 600 rebound as much as 13% since a Feb. 11 low. The MSCI Asia Pacific Index fell 0.7% as all 10 industry groups retreated. Japan's Topix dropped 1%. Japan's economy contracted an annualized 1.1% last quarter, underscoring growing concern over Prime Minister Shinzo Abe's reflation program. China's exports tumbled 25.4% from a year earlier in dollar terms in February as imports fell for the 16th month in a row. “The exports data are very, very poor,” said Castor Pang, head of research with Core-Pacific Yamaichi Hong Kong. “The huge decline doesn't auger well for the stock market.” EMERGING MARKETS The MSCI Emerging Markets Index slipped for the first time in eight days, losing 0.6%, as the Chinese data highlighted shrinking global demand. Weaker commodities and a wider-than-estimated current account deficit in South Africa weighed on the rand. A gauge of 20 developing-nation currencies fell 0.2%, its first decline in seven days. Polish stocks retreated from a three-month high as investors awaited the European Central Bank's policy decisions on Thursday. Markets in Oman, Bahrain and Nigeria dropped as crude oil declined. CURRENCIES The yen strengthened for a second day as investors searched for the safest assets amid the China data and signals from the Japanese central bank that it won't add stimulus anytime soon. The yen appreciated 0.4% to 112.98 per dollar, after reaching 112.75, its strongest level since March 1. Against the euro, the Japanese currency appreciated 0.2% to 124.67. China's yuan climbed 0.17% as the central bank raised its daily reference rate for the currency following Monday data that showed a slide in the nation's foreign-exchange reserves moderated in February. BONDS Japan's 10-year government bond yield slid to an all-time low of minus 0.1%, according to Japan Bond Trading Co., after an auction of 30-year debt drew the strongest demand in almost two years despite a record-low coupon. The yield on 30-year securities tumbled more than 20 basis points, sliding below 0.5% for the first time. The slide in Japan's yields pushed that on 40-year bonds below the level investors demand to hold U.S. two-year notes for the first time since 2008. The yield on 10-year U.S. Treasuries fell six basis points to 1.85%, retreating from a one-month high, and that on similar-maturity German bunds slid four basis points to 0.18% and the five-year yield sank to minus 0.39%. Pacific Investment Management Co. recommends investors move out of government bonds and into corporate credit because the U.S. will avoid a recession. With sovereign notes in Japan and Germany offering negative yields, and equity valuations stretched, it says high-quality company debt, junk bonds and bank loans offer a better risk-adjusted alternative. COMMODITIES Iron-ore futures on the Singapore Exchange fell 8.8%, after a record 19% jump on Monday. Citigroup Inc. said it's still bearish as supply and demand fundamentals remain weak, while Axiom Capital Management Inc. said the price surge was probably just a “blip.” Copper fell 1.3% in London, trimming this month's advance to 5.1%. Nickel slid 3.5%, retreating from its highest close since November. Goldman Sachs reiterated its view that the drivers for last year's slump in industrial metals prices remain intact, predicting drops of as much as 20% for copper and aluminum over the next 12 months. Gold last week entered a bull market — commonly defined as a 20% advance from the most recent low — and platinum and palladium followed suit on Monday. Platinum rose 0.6% on Tuesday, while palladium dropped 1.4%. Brent crude was at $41.03 a barrel, after surging 5.5 % on Monday. It has advanced more than 40 % since slumping to a 12-year low in January amid speculation a proposal by major producers to freeze production will trim a global glut. Data on Wednesday is forecast to show U.S. stockpiles increased last week to the highest level since 1930.