China leads drop that earnings are over valued

China Sparks Drop in Emerging-Market Stocks; Oil, Copper Fall

 Chinese stocks plunged the most in eight months, dragging emerging markets lower, on concern this year’s rally has outpaced prospects for earnings growth. Oil led a drop in commodities.

The Shanghai Composite Index fell 5 percent, its biggest decline since Nov. 18, snapping a five-day, 7 percent advance. The MSCI Emerging Markets Index sank 1.2 percent to 826.18 at 10:15 a.m. in London, the lowest level since July 13. Oil and copper fell the most in three weeks. The yen and the dollar rose as investors shunned higher-yielding currencies.

Chinese stocks are trading at 35.3 times reported earnings, more than twice the average in emerging markets, after a 79 percent surge in the Shanghai index this year on speculation economies are rebounding. Federal Reserve Bank of San Francisco President Janet Yellen said yesterday the U.S. economy’s recovery is likely to be “painfully slow” as consumers spend less and save more.

“After such a good run, there is the temptation for people to get off the rollercoaster,” Brian Jackson, senior strategist at RBC Capital Markets in Hong Kong, said in an interview. “We are going to see more uncertainty and volatility.”

Russia’s ruble fell 1 percent against the dollar, the biggest loser among 26 emerging-market currencies tracked by Bloomberg. Kazakhstan’s eight-stock KASE index dropped 1.9 percent, led by a 7.5 percent slide in Kazakhmys Plc, the central Asian nation’s biggest copper producer.

Akzo, Bayer

Europe’s Dow Jones Stoxx 600 Index climbed 0.6 percent as earnings from Akzo Nobel NV and Bayer AG beat analysts’ estimates, outweighing declining commodity prices and a wider- than-estimated loss from ArcelorMittal SA. Akzo Nobel, the world’s largest maker of coatings and paints, and Bayer, which supplies plastics to the automotive industry, advanced more than 4 percent.

The MSCI Asia Pacific Index declined 0.9 percent after reaching the most expensive relative to the earnings of its companies in six years. Jiangxi Copper Co. slumped 9 percent in Shanghai after forecasting a drop in profit.

Futures on the Standard & Poor’s 500 Index retreated 0.4 percent after the benchmark gauge for U.S. equities climbed to the highest level compared with earnings since September.

The yen and the dollar advanced most against the currencies of commodity-producing countries such as Australia and South Africa. The Aussie dropped 0.9 percent against the yen and 0.7 percent compared with the U.S. dollar, the largest declines in three weeks. The rand slid 0.7 percent versus the yen and 0.5 percent against the U.S. currency.

Oil Stockpiles

Oil dropped as much as 2.4 percent to $65.61 a barrel in New York. U.S. crude stockpiles rose the most since April last week, the American Petroleum Institute said yesterday. Copper for three-month delivery on the London Metal Exchange fell as much as $135, or 2.4 percent, to $5,395 a metric ton on concern Chinese imports are slowing.

Chinese Premier Wen Jiabao’s 4 trillion yuan ($585 billion) stimulus package last year and looser credit restrictions spurred a surge in domestic demand and record bank lending as the global recession led to a slump in exports.

China’s stocks plunged amid speculation the central bank is poised to order lenders to set aside larger reserves, Beijing- based Caijing magazine reported today on its Web site.

The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries rose 8 basis points to 3.89 percentage points, the highest in a week, according to JPMorgan Chase & Co.’s EMBI+ Index.

By Gavin Serkin and Laura Cochrane July 29 (Bloomberg)

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