Investors Slam Emerging Markets, Commodities

This year’s hottest markets went cold Monday as some investors and speculators fled commodities and foreign stocks, spooked in part by last week’s slump on Wall Street.

The sell-offs in metals such as gold and copper and emerging markets including Russia and India left analysts debating whether this was just a pause in those wild bull markets -- or the beginning of a prolonged decline.

Gold, which last week hit a 25-year high, dived $26.70, or 3.8%, to $683.60 an ounce in New York futures trading. Prices of other precious and industrial metals also plummeted.

Most foreign stock markets also suffered steep losses after racking up huge gains since October. Russia’s main market index plunged 5.4%. The Indian market slid 3.8%, and Brazil’s main gauge lost 2.3%.

Wall Street, by contrast, was relatively placid. The Dow Jones industrial average rose 47.78 points, or 0.4%, to 11,428.77 after falling a combined 260 points Thursday and Friday. Other U.S. stock indexes were mixed. Bond yields fell, and the dollar rallied.

The U.S. market retreated late last week after the Federal Reserve raised its key short-term interest rate for the 16th time since 2004, to 5%, and disappointed investors who had hoped that policymakers would strongly signal that they were at the end of their credit-tightening campaign.

Because of rising inflation pressures in the U.S. economy, some analysts now think that the Fed might raise rates several more times. That helped drive long-term Treasury bond yields to four-year highs Friday, boosting fears of a sharp economic slowdown.

Those concerns began to spill into other world markets Friday, and the selling accelerated Monday.

Yet many analysts described the sell-offs in commodities and foreign stocks as overdue, given price gains in recent months that in some cases rivaled the performance of dot-com shares in the late 1990s.

Although the commodity and foreign market gains of the last few years have had a solid fundamental underpinning -- a powerful global economic expansion -- some experts said the markets had been hijacked this year by speculators, including hedge funds.

Copper futures prices in New York, for example, rocketed 79% in two months, from $2.25 a pound in mid-March to a record $4.03 on Thursday. The price dropped 6.6 cents Friday, then tumbled 9.8 cents Monday to $3.87 a pound.

For copper, “it was only a question of time,” said Peter Grandich, a veteran commodity analyst who writes a market newsletter in Perrineville, N.J.

“There has been a speculative nature to this that has been different from anything we’ve seen before,” he said of the run-up in metal prices.

Because many developing economies have benefited from soaring prices of the commodities they export, their stock markets were hurt Monday in part by the decline in raw materials prices -- including oil, which fell $2.63 to $69.41 a barrel in New York.

The main stock index of Mexico, a major oil exporter, slid 2%.

But foreign stocks, particularly those in emerging markets, were vulnerable largely because they have rallied with little interruption since October, analysts said.

“They have not corrected with any degree of seriousness in quite a long time,” said Cameron Brandt, global markets analyst at Emerging Portfolio Fund Research in Cambridge, Mass.

What’s more, the gains in many emerging markets were inflated in recent weeks by continuing heavy purchases by U.S. and European investors, Brandt said. Emerging-market stock funds took in a net $2.8 billion in fresh capital in the seven days ended Wednesday, the most since early February, he said.

Michael Metz, investment strategist at Oppenheimer Holdings in New York, said foreign markets could continue to slide in the near term as some investors cash out large paper gains accumulated in recent years.

Even so, “I think this is the growth story of the future,” he said of foreign markets, citing the rise of consumer societies in China, India and elsewhere.

Some analysts also believe that the bull market in commodities hasn’t run its course, assuming the global economy continues to expand.

Grandich said his “worst-case scenario” for gold was a temporary pullback to about $575 an ounce, representing a 20% decline from the 25-year high of nearly $720 reached last week.

For stock markets, a decline of 10% to 15% would be considered a normal correction in a bull market. Few world markets are even close to a 10% pullback from their recent peaks.

Among Monday’s highlights:

* The U.S. stock market pulled up late in the session, led by blue chips. The Dow had lost 47 points before rebounding.

Some experts said the index’s gain signaled that investors sought the relative safety of big-name issues while exiting higher-risk markets. Johnson & Johnson rose $1.14 to $59.97; Coca-Cola added 76 cents to $43.94.

The Standard & Poor’s 500 index added 3.26 points, or 0.2%, to 1,294.50.

* While blue chip indexes edged up, the technology-heavy Nasdaq composite lost 5.26 points, or 0.2%, to 2,238.52, its fifth straight decline.

The Russell 2,000 small-stock index fell 0.6% to 737.64. It is down 5.6% from its all-time high reached May 5. Smaller stocks, like emerging markets, are more vulnerable to an extended sell-off because they have performed so well in recent years, analysts warned.

* Losers topped winners by about 7 to 3 on the New York Stock Exchange, but that was an improvement from Friday, when losers had an almost 4-1 edge.

* Commodity-related U.S. stocks led the losers list. ConocoPhillips fell $1.67 to $63.52, mining firm Rio Tinto tumbled $12.36 to $225.67 and Glamis Gold shed $4.17 to $35.27.

* Treasury bond yields declined, benefiting as money leaving stocks looked for a home, analysts said. The 10-year Treasury note yield ended at 5.16%, down from 5.20% Friday.

* The dollar, which had plunged in recent weeks, rallied modestly against the euro and the yen as U.S. markets held up better than many overseas. The euro slipped to $1.281 from $1.291 on Friday.

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]The sell-off in stocks, so far

How key stock market indexes worldwide performed Monday, and their percentage declines from their recent peaks.

*--* Mon. Mon. pctg. Pctg. drop from YTD Country/index close change recent high* change U.S./Dow industrials 11,428.77 +0.4% -1.8% +6.6% U.S./S&P; 500 1,294.50 +0.2 -2.4 +3.7 S. Korea/compos 1,413.98 -2.2 -3.5 +2.5 Germany/DAX 5,857.03 -1.0 -4.6 +8.3 France/CAC 5,064.85 -1.7 -4.6 +7.4 Mexico/IPC 20,722.13 -2.0 -5.0 +16.4 Canada/S&P-TSX; 11,831.73 -1.7 -5.2 +5.0 U.S./Nasdaq compos. 2,238.52 -0.2 -5.6 +1.5 U.S./Russell 2,000 737.64 -0.6 -5.6 +9.6 Japan/Nikkei 16,486.91 -0.7 -6.1 +2.3 India/Sensex 11,822.20 -3.8 -6.3 +25.8 Russia/RTS 1,589.46 -5.4 -10.0 +41.2

*--*

*Each index listed hit a multiyear or record high between April 7 and Thursday.

Source: Bloomberg News