(Bloomberg) — U.S. index futures erased gains after a high-yield credit fund liquidated its entire portfolio, with investor concern about global growth prospects lingering as the Federal Reserve prepares to raise interest rates.
Standard & Poor’s 500 Index E-mini contracts expiring in March fell 0.2 percent to 1,996.75 at 7:17 a.m. in New York, after earlier rising as much as 0.9 percent. Lucidus Capital Partners said that it has liquidated its entire portfolio and plans to return the $900 million it has under management to investors next month. Dow Jones Industrial Average futures lost 49 points, or 0.3 percent, to 17,130, today.
“It actually bothers me a whole lot that credit funds are being forced to suspend redemptions or even liquidate,” said Thomas Thygesen, SEB’s head of cross-asset strategy in Copenhagen. “One of the big danger signs that we’ve all been talking about for the past few years is that there a lot of liquid instruments in illiquid markets. The risk is that this could lead to a more generalized outflow. Nothing can contain a selloff like that.”
The S&P 500 slid to a two-month low on Friday, rounding off its first weekly drop in four. Financial shares tumbled as asset managers were routed after a high-yield mutual fund suspended redemptions.
Stocks worldwide have sputtered this month, as the prospects for a Fed rate increase as soon as Dec. 16 and a drop in oil sparked a selloff in riskier assets. The 3.3 percent decline for the S&P 500 is so far proving an exception to a historical trend of a strong December performance, and would mark the worst end to a year since 2002.
The S&P 500’s drop has dragged it closer to levels that chart analysts call oversold. Its relative-strength index is the lowest since September.
Next year isn’t looking too bright for U.S. equity investors, with valuations likely to contract after the Fed’s rate increase. Past hikes have almost always put a ceiling on S&P 500 price-earnings ratios, and this would come at a time when profits are already in decline. Such a combination hasn’t occurred in five decades.
Traders are pricing in a 74 percent chance that the Fed’s meeting will confirm Chair Janet Yellen’s belief that the U.S. economy is strong enough to withstand the first increase in borrowing costs since 2006. Still, investors are caught between optimism about the U.S. and concern that a slowdown in China and the consequent tumble in commodities will damp global growth prospects.
Investors have few economic cues to go on before the Fed’s announcement, with reports on housing starts and industrial production scheduled for the day of the decision, while a release on jobs comes the following day. Although data have been improving lately, it’s still missing economists’ projections, according to Bloomberg’s economic surprise index.
The final batch of major earnings releases will also be in focus this week, with FedEx Corp. and Oracle Corp. due to report. With almost all members of the S&P 500 having posted results, about 74 percent beat profit estimates, while only 44 percent exceeded sales forecasts.
To contact the reporter on this story: Sofia Horta e Costa in London at firstname.lastname@example.org To contact the editors responsible for this story: Cecile Vannucci at email@example.com Alan Soughley, Namitha Jagadeesh
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