Treasuries Rise With Gold, Stocks Fall on Geopolitical Tension

(Bloomberg) -- Treasuries rose and stocks erased modest gains after U.S. defense officials said a Chinese naval ship seized an unmanned drone in the South China Sea.The dollar’s advance stalled as the dust settled on a new financial-market landscape created by the Federal Reserve’s shift to a tighter policy path in 2017.

The yield on 10-year Treasuries fell as much as five basis points and gold futures advanced as investors sought safety assets. Crude jumped 2 percent toward $52 a barrel in New York, as a rise in maritime tensions could crimp deliveries. U.S. equities erased 0.4 percent from session highs, and the dollar retreated versus its major peers. Soybean futures erased losses on the news.

Stocks in the U.S. retreated from session highs and Treasuries extended gains after officials said the drone was deployed by an American oceanographic vessel and the U.S. has issued a formal demand for return of the vehicle, according to a Reuters report. The move in the dollar mark a step back after a dramatic week in which the U.S. central bank unveiled its outlook for an accelerated series of rate increases in 2017. That steeper path comes as President-elect Donald Trump prepares a spending agenda that may fuel fast growth and inflation in the world’s biggest economy. Volumes are expected to thin in coming weeks as traders close positions before the December holiday season and end of the year.

“The market has been in its own little world and I think we’re going to hear more about this, the market’s been overlooking it a little bit,” Michael Block, chief strategist at Rhino Trading Partners LLC in New York, said by phone. “We’re assuming trade and all that is going to go in our favor but feathers are going to be ruffled and it’s not a linear process. It should be good but there are a lot of geopolitical risks.”

Stocks

• The S&P 500 fell 0.2 percent to 2,258 at 4 p.m., after rising as much as 0.2 percent. The measure barely moved in the week after rising to a record. The Dow added 0.4 percent in the five days, for its sixth straight weekly gain, the longest run in a year.
• The Stoxx Europe 600 Index added 0.3 percent, led by Actelion Ltd.’s jump of 8.4 percent after people with knowledge of the matter said Sanofi is in talks to acquire the Swiss drugmaker.
• Emerging-market stocks fell for a third day, heading for a weekly slide of 2.4 percent that is the biggest in a month.

Currencies

• The dollar slipped 0.3 percent to $1.04395 per euro. It reached $1.0367 on Thursday, its strongest level since January 2003. The Bloomberg Dollar Spot Index edged higher, headed for a gain of 1.4 percent in the week.
• U.S. housing starts slumped 18.7 percent to a 1.09 million annualized rate last month after rising to a 1.34 million pace.

Bonds

• The yield on 10-year Treasury notes fell less than one basis point to 2.59 percent, the first time it has fallen in seven days. Borrowing costs for U.S. debt due in a decade touched the highest level since September 2014 on Thursday.
• Two-year yields slid two basis points to 1.26 percent.
• German’s 10-year yield fell five basis points to 0.31 percent.

Commodities

• West Texas Intermediate crude gained for the first time in three days, rising 2 percent to $51.90. Prices closed at the highest since July 2015 on Tuesday and ended the week up 0.8 percent.
• Gold futures climbed 0.6 percent to $1,134.04 an ounce. The metal fell more than 2 percent in the week for a sixth straight slump since the election.
• Copper had its biggest weekly drop since August after stockpiles tracked by the London Metal Exchange jumped the most since 1970 in the period.

--With assistance from Natasha Doff Cecile Gutscher and Oliver Renick To contact the reporter on this story: Jeremy Herron in New York at jherron8@bloomberg.net. To contact the editors responsible for this story: Emma O'Brien at eobrien6@bloomberg.net, Jeremy Herron, David Goodman