On 20 June, 2017 – Declining oil prices sent stocks tumbling
Stocks reversed some of Monday’s stellar gains.
United States
A sharp drop in oil prices sent stocks down from record levels. Some investors were monitoring the results of a congressional election in Georgia. The Dow Jones industrials were down 0.3 percent, the S&P retreated 0.7 percent and the Nasdaq declined 0.8 percent.
Oil prices plunged to seven-month lows after news of increases in supply by several key producers including Nigeria and Libya — a trend that has undermined attempts by OPEC and other producers to support the market through reduced output. Stocks other than energy shares were affected by the decline in oil prices as well. Energy stocks were among the biggest decliners after US crude oil fell into the first bear market since last summer. But the consumer discretionary, industrial and telecommunications sectors all retreated as well. Investors rotated towards defensive stocks because of the insulation they provide during market tumult. Healthcare and utilities both posted gains, while consumer staples were marginally lower.
Transocean, Hess and Marathon Oil were lower as falling oil prices put profit expectations at risk. Lennar rose after reporting stronger revenue and earnings for the latest quarter than expected. Parexel International, a biopharmaceutical services provider, jumped after it said it will go private following a buyout by Pamplona Capital Management. The investment firm agreed to pay $88.10 per share in cash for the company. Parexel jumped. Chipotle Mexican Grill slumped after broker downgrades. Chipotle fell after it said its operating costs in the second quarter will be slightly higher than the first quarter.
Adobe Systems reported a 26.7 percent jump in revenue, the 13th straight quarter of increase, as more customers subscribed to its Creative Cloud package of software tools, which include Photoshop. The company’s net income rose to $374.4 million or 75 cents per share in the second quarter ended June 2 from $244.1 million or 48 cents per share a year earlier. Revenue rose to $1.77 billion from $1.40 billion.
On Tuesday, Boston Fed President Eric Rosengren said that the era of low interest rates in the United States and elsewhere poses financial stability risks and that central bankers must factor such concerns into their decision-making.
These data reflect observations at 4:00 PM US ET. Gold at the afternoon London fixing was down US$5.95 to US$1,242.20. Copper futures were down 1.15 percent to US$2.58. WTI spot crude was down 86 US cents to US$43.34. Dated Brent spot crude was down 94 US cents to US$45.97. The US dollar was up against the euro, pound and the Canadian and Australian dollar. The currency declined against the yen and was unchanged against the Swiss franc. The Dollar Index was up 0.2 percent. The yield on US Treasury 30 year bond was down 4 basis points to 2.74 percent while the yield on the 10 year note was down 3 basis points to 2.16 percent.
Europe
After rallying on Monday, stocks retreated on Tuesday thanks to tumbling oil prices. Early gains were driven by yesterday’s record setting performance in the US and continued euphoria from the French election results. However, dovish comments from Bank of England Governor Mark Carney combined with the steep drop in crude oil prices made investors risk averse. Energy stocks were under pressure as crude prices tumbled to near bear market territory. The FTSE dropped 0.7 percent, the CAC declined 0.3 percent, the DAX lost 0.6 percent and the SMI slipped 0.1 percent. Worries about oversupply in the global oil market persist even after the Organization of the Petroleum Exporting Countries and other major oil producers agreed to keep curbing production into the first quarter of 2018.
In his delayed Mansion House speech, Bank of England Governor Mark Carney said that the time is not right to begin raising interest rates. He cited weak wage growth and inflationary pressures. Carney noted that mixed signals on consumer spending and business investment and the still subdued domestic inflationary pressures — in particular anemic wage growth — it is not yet the time to begin that adjustment.
The Confederation of British Industry (CBI) forecast steady but subdued economic growth for the UK over the next couple of years given the headwinds the country faces. CBI said British businesses and the government should navigate carefully going forward because of the ongoing political uncertainty and Brexit negotiations. It forecast 1.6 percent growth for this year and 1.4 percent for 2018.
Dassault Systèmes advanced after it acquired a majority stake in Outscale, a global leader in enterprise-class cloud services. Barclays slipped after the Serious Fraud Office charged the British lender, its former chief executive and three other former top executives with fraud over their actions in the 2008 financial crisis. Wolseley slipped despite the plumbing and heating supplier forecasting annual trading profit in line with expectations. BT Group dropped after saying it would repurchase up to £200 million pounds of shares from French telecoms group Orange. Novartis climbed in Zurich after its eye drug RTH258 met the primary and key secondary endpoints in two Phase III studies. Heineken rose in Amsterdam ahead of the deadline to address concerns expressed by the competitions watchdog over its planned acquisition of Punch Taverns outlets. Both BP and Royal Dutch Shell dropped along with mining shares.
Asia Pacific
Asian stocks were mixed Tuesday. While another record close in US stocks helped underpin investor sentiment, falling oil prices and uncertainty ahead of a decision by US index provider MSCI on whether to include China A-shares in its Emerging Market Index served to keep the underlying mood somewhat cautious. New York Fed President William Dudley said in a speech on Monday that rising wages would boost US inflation and this helped lift the dollar to a three-week high against the Japanese yen.
The Nikkei was up 0.8 percent and the Topix added 0.7 percent as the US dollar extended gains against the yen and technology stocks followed their US peers higher. Sharp jumped after the company said it would apply for relisting on the first section of the Tokyo Stock Exchange. Iwaki and Askul advanced after raising their outlook. Analysts said the bullish tone in the Japanese stock market stemmed largely from the stronger US dollar and nascent economic recoveries in Japan, the United States and Europe.
The S&P/ASX declined 0.8 percent and the All Ordinaries were down 0.7 percent. A gauge of consumer confidence weakened and the Reserve Bank of Australia’s minutes of the June board meeting indicated that members are concerned about soaring household debt in the country’s red-hot property market and weak wages growth. The big four banks dropped after Moody’s Investors Services downgraded their credit ratings, citing elevated risks in the household sector. Retail landlord Scentre Group and GPT Group declined on worries about their outlooks. Energy majors Woodside Petroleum, Santos, Oil Search and Origin Energy followed oil prices lower. BHP Billiton and Rio Tinto ended with modest losses.
The Shanghai Composite slipped 0.1 percent while the Hang Seng retreated 0.3 percent with Chinese companies listed in the city pacing declines, as investors braced for MSCI’s verdict on whether it would include yuan-denominated mainland shares in its benchmark indexes. MSCI, whose indexes currently include Chinese shares listed outside the mainland as well as foreign currency-denominated B-shares in Shanghai and Shenzhen, decided against including A-shares in the MSCI Emerging Markets Index over the past three years. A favorable decision this time could potentially clear the path for billions of dollars in additional inflows into mainland Chinese equities.
The Kospi slipped 0.1 percent. The Sensex was virtually unchanged (down 14.04 points).
Looking forward
UK posts May public sector finances. In the US, May existing home sales and weekly EIA petroleum status report will be released.
Global Stock Markets
*Note — all releases are listed in local time.
Source: Fidelity
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