Global stocks drop on weak commodities, US rate hike hint

Global equity markets fell on Thursday, pulled lower by declining commodity prices that hurt energy shares, and comments by a Federal Reserve policymaker who hinted that a widely-anticipated interest rate hike next month is possible.

Gold fell to its lowest level since early 2010 on concerns about a rate hike by the US central bank, and copper prices tumbled to their weakest in more than six years.

Weakness on Wall Street, a drop in commodity prices and poor earnings results dragged shares lower in Europe. The pan-European FTSEurofirst 300 index .FTEU3 closed down 1.6 percent at 1,470.05 points in its biggest daily decline since Sept. 28.

Stocks weakened after US jobs data supported the view that the Fed will raise rates in December. Initial claims for state unemployment benefits were unchanged at a seasonally adjusted 276,000, close to levels last seen in the early 1970s.

The MSCI all-country world index .MIWD00000PUS lost 0.86 percent, while US stock indexes posted their steepest fall since late September.

Following October' s surge of about 8 percent, stock investors worried about China' s economy and a US rate hike are taking money off the table, said Michael Matousek, head trader at US Global Investors Inc in San Antonio, which manages about $ 1.3 billion.

" That' s why you have some of this selloff. We' re down but it' s not like the sky is falling," Matousek said.

The Dow Jones industrial average .DJI closed down 254.15 points, or 1.44 percent, to 17,448.07. The S & P 500 .SPX fell 29.03 points, or 1.4 percent, to 2,045.97 and the Nasdaq Composite .IXIC lost 61.94 points, or 1.22 percent, to 5,005.08 . Crude prices hit 2-1 / 2 month lows after the US government reported a stockpile build four times above market expectations and OPEC said its current output could result in a daily surplus of more than 500,000 barrels by next year.

Crude futures fell about 3 percent after the US Energy Information Administration said stockpiles rose by 4.2 million barrels last week, citing higher imports. [EIA / S]

US crude CLc1 fell $ 1.18 to settle at $ 41.75 a barrel, and Brent crude LCOc1 slipped $ 1.75 to settle at $ 44.06 a barrel.

 

 

US stocks finished lower on Wednesday after investors sold oil companies and dumped brick-and-mortar retailers after a disappointing forecast from Macy' s.

Energy stocks were bogged down by a more than 3 percent drop in oil prices to their lowest since mid-September on worries about growing US stockpiles.

The S & P energy sector .SPNY lost 1.91 percent, the steepest decline among the 10 major S & P sectors. Exxon Mobil (XOM.N) slipped 0.89 percent and weighed most on the S & P along with Apple (AAPL.O), down 0.56 percent.

It was the second straight day of what investors described as largely directionless trading, with the US Federal Reserve widely expected to raise interest rates in December for the first time in nearly a decade.

" The market has internalized the fact that there is going to be a rate increase," said Donald Selkin, chief market strategist at National Securities in New York, which has about $ 3 billion in assets under management.

" The market is going to drift for the next few weeks until the Fed announces its decision, but you will see big moves in individual stocks," Selkin said.

General Electric (GE.N) and Amazon (AMZN.O) gave the biggest boost to the index, with GE up 1.83 percent and the online retail heavyweight rising 2.06 percent.

Retailers sank after Macy' s (MN) said same-store sales unexpectedly fell in the third quarter and slashed its sales and profit forecasts for the holiday quarter ending in January.

Macy' s shares plummeted 13.99 percent, while JC Penney (JCP.N) dropped 1.84 percent despite a 6.4 percent increase in same-store sales.

Shares of Nordstrom (JWN.N), Dillard' s (DDS.N) and Kohl' s (KSS.N) dropped between 3 percent and 9 percent.

Alibaba' s (BABA.N) shares lost 1.94 percent even though the Chinese e-commerce giant said sales in its annual Singles' Day online shopping event on Wednesday hit a record $ 14.3 billion.

The Dow and S & P lost ground late in the day after trading close to break-even for much of the session.

All three major US indexes closed 0.32 percent weaker: the Dow Jones industrial average .DJI lost 55.99 points to end at 17,702.22 points The S & P 500 .SPX fell 6.72 points to 2,075 The Nasdaq Composite .IXIC dropped 16.22 points to 5,067.02...

U.S. bond markets were closed for Veterans Day.

Six of the 10 major S & P sectors were lower, with the utilities .SPLRCU and telecoms .SPLRCL index leading gainers.

Apache Corp (APA.N) fell 7.33 percent after Anadarko Petroleum (APC.N) confirmed its offer to buy the company
image: http://images.intellitxt.com/ast/adTypes/icon1.png

  had been rejected. Anadarko was down 3.80 percent.

Declining issues outnumbered advancing ones on the NYSE by 1,742 to 1,304. On the Nasdaq, 1,788 issues fell and 987 advanced.

The S & P 500 showed 15 new 52-week highs and 11 lows, while the Nasdaq posted 98 new highs and 113 lows.

Volume was low, with about 6.2 billion shares changing hands on US exchanges, below the 7.1 billion daily average for the past 20 trading days, according to Thomson Reuters data.

 

 

 

 

Asian Indexes

	Index	Country	Change	% Change	Level	Last Update
	Australia ASX All Ordinaries	Australia	+23.40	+0.45%	5,181.10	12:38am ET
	Shanghai SE Composite Index	China	+9.76	+0.27%	3,650.25	2:29am ET
	Hang Seng	Hong Kong	-49.53	-0.22%	22,352.17	3:01am ET
	Mumbai Sensex	India	0.00	0.00%	25,743.26	Nov 10
	Nikkei 225	Japan	+20.13	+0.10%	19,691.39	1:15am ET
	Taiwan TSEC 50 Index	Taiwan	-121.89	-1.43%	8,415.01	12:33am ET

" Stocks also belie this belief that the Fed finally has it right, that growth is finally accelerating and the real recovery is finally underway.  Yes, stocks have rallied nicely the last few weeks and have nearly recovered from their August swoon. But all that has done so far is to bring stocks back to where they were in mid-August just before the sell off.  While it is certainly possible that we will yet make new highs,  I think it is important that momentum is not confirming the move higher except, again, in the very short term. Long term momentum indicators still show a market in the process of topping."

He is correct. As shown in the  MONTHLY  chart below, a variety of measures still remain very concerning on a long-term basis registering signals only witnessed at peaks of past bull markets.



There is little evidence currently that the rally over the last couple of months has done much to reverse the more " bearish" market signals that currently exist. Furthermore, as noted by Jochen Schmidt, the current market action may be more indicative of market topping process.

As shown in the next chart, Jochen' s point can be seen more clearly by looking at a longer-term chart of previous bull market topping processes.

Warning Signs Everywhere

Many have pointed to the recent correction as a repeat of the 2011  &ldquo debt ceiling default&rdquo   crisis. Of course, the real issue in 2011 was the economic impact of the Japanese tsunami/earthquake/meltdown trifecta, combined with the absence of liquidity support following the end of QE-2, which led to a sharp drop in economic activity. While many might suggest that the current environment is similar, there is a marked difference.

The fall/winter of 2011 was fueled by comments, and actions, of accommodative policies by the Federal Reserve as they instituted  &ldquo operation twist&rdquo   and a continuation of the  &ldquo zero interest rate policy&rdquo   (ZIRP). Furthermore, the economy was boosted in the third and fourth quarters of 2011 as oil prices fell, Japan manufacturing came back on-line to fill the void of pent-up demand for inventory restocking and the warmest winter in 65-years which gave a boost to consumers wallets and allowed for higher rates of production.

2015 is a much different picture. 

First,  while the Federal Reserve is still reinvesting proceeds from the bloated $4 Trillion balance sheet, which provides for intermittent pops of liquidity into the financial market, they are now seriously discussing &ldquo tightening&rdquo monetary policy by the end of the year.

Secondly, despite hopes of a stronger rates of economic growth, it appears that the domestic economy is weakening considerably as the effects of a global deflationary slowdown wash back onto the U.S. economy.



Third,  while  &ldquo services&rdquo   seems to be holding up despite a slowdown in&ldquo manufacturing,&rdquo   the service sector is being obfuscated by sharp increases in&ldquo healthcare&rdquo   spending due to sharply rising costs of healthcare premiums. While the diversion of spending is inflating the services related part of the economy, it is not a representation of a stronger &ldquo real&rdquo economy that creates jobs and increase wages.



Fourth,  the strong US dollar, as compared to other currencies racing for the bottom, is having a negative effect on companies with international exposure. Exports, which make up more than 40% of corporate profits, are sharply impacting results in more than just  &ldquo energy-related&rdquo   areas.  As I discussed recently, this is not just a  &ldquo profits recession,&rdquo   it is a  &ldquo revenue recession&rdquo   which are two different things.

The chart below shows the S& P 500 as compared to the US Dollar. Since the turn of the century, declines in this ratio below the 18-month moving average, have been coincident with more severe market reversions and economic recessions.



Lastly,  it is important to remember that US markets are not an  &ldquo island.&rdquo   What happens in global financial markets will ultimately impact the U.S. The chart below shows the S& P 500 as compared on a performance basis to the MSCI Emerging Markets and Developed International indices. I have highlighted previous peaks and subsequent bear markets. Currently, the weakness in the international markets is being dismissed by investors, but it most likely should not be.

Looking For " Santa Claus"

As I suggested above the  " seasonally strong"   period of the year may present an opportunity for more seasoned and tactical traders willing to take on additioinal risk.   However, for longer-term investors the risk/reward ratio is not favorably tilted currently.

As we progress though the last two months of the year, historical tendencies suggest a bias to the upside. This is particuarly the case given the weakness this past summer which has left many mutual and hedge funds trailing their benchmarks.  The need to play  " catch-up"   will likely create a push into larger capitalization stocks as portfolios are  " window dressed"   for year end reporting.

This traditional  " Santa Claus"   rally, however,  does not guarantee the resumption of the ongoing  " bull market"   into 2016. 

For that corporate earnings will need to recover, and soon. However, as Joe notes in his missive, this is unlikely to occur:

There is a vast difference between having a strong dollar in a strongly growing economy, and a strong dollar in a weak one.  The later weighs on further growth as the deterioration of exports is not offset by the rising consumption of imports.  As I discussed last week,  a combination of plunging imports and exports is something that should not be ignored.

" The sharp rise in the dollar, which has been cited by many companies as the reason for weak earnings results due to the negative impact to exports, should be a boon for consumers as the stronger dollar makes imports cheaper. However, that has clearly not been the case and suggests the domestic consumer is substantially weaker than other headline data suggests."

 

The import/export data is suggesting that the global weakness arising from China and the Eurozone have now impacted the domestic economy. While the Fed continues to suggest that economic strength is improving, the underlying data continues to suggest it isn' t."

There is a probability that the markets could rally through the end of the year.  However, without a strengthening of the earnings and economic backdrop, such a rally will likely be a continuation of the current market topping process over the intermediate term.

While none of this means that a major market reversion is imminent, it does suggest taking on an accelerated risk profile in the current environment will likely not be greatly rewarding.