U.S. Stocks Fall While VIX Jumps Amid Ukraine Tensions

July 17, 2014

Los Angeles (July 17)  U.S. stocks fell while the VIX (VIX) jumped the most since January as the crash of a passenger jet in Ukraine sparked concern tensions in the region may escalate.

The Bloomberg U.S. Airline Index slumped 2.3 percent. SanDisk Corp. dropped 14 percent after posting profit margins and sales forecasts that fell short of some analysts’ estimates. UnitedHealth jumped 2.3 percent as earnings topped forecasts. Microsoft gained 1.4 percent after saying it will eliminate as many as 18,000 jobs, the largest round of cuts in its history.

The Standard & Poor’s 500 Index (SPX) fell 0.8 percent to 1,966.43 at 2:40 p.m. in New York, heading for its largest decline since May. The Dow slipped 92.03 points, or 0.5 percent, to 17,046.17. The Russell 2000 Index of smaller companies dropped 1.1 percent for its third straight day of declines. Chicago Board Options Exchange Volatility Index surged 23 percent, the most since Jan. 24. Trading in S&P 500 companies was 29 percent above the 30-day average for this time of day.

“People are selling out of fear,” Todd Lowenstein, a fund manager who helps manage $16 billion at Highmark Capital Management Inc. in Los Angeles, said in a phone interview. “The market is really acute to geopolitical risk. Given where valuations are and the move lately amid all the M&A activity, when you have some geopolitical shocks, people will look for a reason to sell.”

The Malaysian Airlines jet was shot down over eastern Ukraine killing all 295 people on board, with the government in Kiev blaming pro-Russian rebels. The separatists deny the accusation.

Civil War

The plane crashed in the main battleground of Ukraine’s civil war and is one of a number to have been downed in the region in the past month. Russian President Vladimir Putin has repeatedly denied his country has any involvement in the insurgency. The U.S. said this week that Russia is supplying the rebels with weapons.

Stocks fell earlier today after the U.S. and European Union imposed sanctions on Russian banks, energy companies and defense firms in the latest attempt to pressure the country to end support for Ukrainian rebels.

The VIX rose to the highest level since May 16. The gauge jumped 17 percent last week for its biggest rally in three months, after closing July 3 at the lowest since 2007.

“Markets have to figure out if this is really an escalation of the conflict,” John Canally, an economic strategist at LPL Financial Corp., said in a phone interview from Boston. His firm oversees about $447.1 billion. “Markets have already been here before. This Ukraine situation started in February and this is kind of another wave of the escalation.”

Earnings Season

The S&P 500 has rallied 6.4 percent this year amid better-than-estimated corporate earnings and central bank stimulus as the U.S. economy shows signs of recovering from a 2.9 percent contraction in the first quarter. The benchmark index increased 0.4 percent yesterday as companies from Time Warner Inc. to Intel Corp. rallied amid deals and better-than-forecast earnings.

A total of 24 companies on the S&P 500 report earnings today, including Google Inc. and Schlumberger Ltd. Profit by the gauge’s members increased 4.5 percent in the second quarter, and revenue rose 3.1 percent, according to analysts’ estimates compiled by Bloomberg.

Housing Starts

Economic data showed beginning home construction unexpectedly declined in June to a nine-month low as a record plunge in the South swamped gains in the rest of the U.S. The number of Americans filing applications for unemployment benefits dropped last week, showing further healing in the labor market, while the Federal Reserve Bank of Philadelphia’s factory index increased in July.

Fed Bank of St. Louis President James Bullard said gains in the U.S. labor market and accelerating inflation may prompt an earlier exit from unprecedented stimulus.

“If macroeconomic conditions continue to improve at the current pace, the normalization process may need to begin sooner rather than later,” Bullard said in remarks prepared for a speech today in Owensboro, Kentucky.

Fed Chair Janet Yellen said told lawmakers yesterday the central bank plans to press on with record easing to combat persistent weakness in the job market.

Stock Valuations

Yellen also said asset valuations in general aren’t out of line with historical norms, after a central bank report earlier in the week indicated prices for smaller social-media and biotechnology companies are substantially stretched.

With the Dow at a record and the S&P 500 close to an all-time high reached this month, financial professionals are growing more anxious. Forty-seven percent of investors, analysts and traders in a Bloomberg Global Poll said the equity market is close to unsustainable levels, while 14 percent already see a bubble. Most respondents said stock swings will increase within six months, the July 15-16 poll showed.

All 10 main industries in the S&P 500 fell today, with energy and industrial shares dropping at least 1 percent for the largest declines.

Airlines slumped, as Delta Air Lines Inc., American Airlines Group Inc. and United Continental Holdings Corp. retreated more than 2.4 percent.

SanDisk Tumbles

SanDisk tumbled 14 percent, its biggest loss in two years. The company, which had rallied 53 percent this year, has held back on increasing production, seeking to avoid a repeat of supply gluts that have caused semiconductor prices to fall below the cost of manufacturing. The chipmaker expects it won’t have enough inventory to meet all orders this quarter, it said.

AutoNation Inc. dropped 7.8 percent, the most since 2012, after the largest U.S. new-vehicle retailer reported quarterly profit that missed forecasts as investment in an online sales system increased costs.

Yum! Brands Inc. retreated 6.5 percent. The owner of fast-food chains such as KFC and Taco Bell posted second-quarter profit that trailed some analysts’ estimates, dragged down by a slump at its Pizza Hut (YUM) restaurants.

Mattel Inc. fell 7.4 percent, the most since January, as second-quarter earnings and sales missed analysts’ estimates.

UnitedHealth added 2.3 percent to a record $85.67. The largest U.S. health insurer by sales beat analyst earnings estimates as revenue grew from its technology and consulting unit that helped fix the Obamacare insurance website.

Microsoft increased 1.4 percent on the job cuts as Chief Executive Officer Satya Nadella integrates Nokia Oyj’s handset unit and slims down the software maker. The restructuring, amounting to about 14 percent of its workforce, includes 12,500 factory and professional positions, the world’s biggest software maker said in a statement.

Source: Bloomberg

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