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Concerns That Energy Weakness Has Spread to the Rest of the Economy Drives Stocks Lower

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Today's financial recap and tomorrow's financial outlook.

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It was another rough day for markets. The major driver of the weakness in risk assets today was the increasing probability that oil-related weakness would spread to other parts of the economy, which would be a drag on companies' earnings.

US Steel (X) announced today that it was temporarily shuttering two oil and natural gas pipe plants in the Ohio and Texas areas and laying off 756 workers (about 1.5% of its workforce). This comes after downgrades yesterday by Evercore ISI on Caterpillar (CAT), United Rentals (URI), and Terex (TEX) for oil-related reasons. All have dropped substantially the past three days.

Crude oil weakness was also a factor yet again today. West-Texas intermediate futures fell another 4.04% today and are now down 10.14% for the year. There was no specific reason for the decline, although the API inventory data after the close of trading was..

The S&P 500 (SPX) dropped by 0.89% and trading was very erratic today. At one point, the index had risen by 0.50%, only to fall almost 40 points in the next three hours. An afternoon rally was nearly snuffed out with intense selling pressure in the closing hour. The SPX is now off to its fourth worst start to the year in history. The only other worse years were 1932, 2000, and 2008 (source: Jason Goepfert). The decline today was led by financial and energy stocks. Metals and mining stocks were top performers today as they continued their New Year's bounce.

US Treasuries continued the strong rally they've experienced over the last week. The 10-year yield fell below 2% today and touched 1.88% - a drop of 14.5bps - before pulling back slightly as equities reversed. The 10-year German Bund closed at a yield of 0.447%, a new record low.

Tomorrow's Financial Outlook

There are two major events scheduled for the US tomorrow. First is the December ADP private payrolls report. Economists expect a very strong report for the month with payrolls rising by 225K after an increase of 208K in November. This report will give a strong preview of what the government payrolls report will be on Friday. Also scheduled to be released tomorrow is the minutes of the December FOMC meeting. At the meeting, market participants believed that the Fed had finally seen enough progress in the labor markets to begin raising interest rates. Further information on that thought process, and the "measured pace" that they expect to hike rates, will be subjects of interest in the release tomorrow.

Two big reports are due out in Europe tomorrow as well. Germany will release employment data for November. Germany is viewed as the main engine of growth in Germany so any deterioration here will be viewed as highly negative. Separately, a major focal point of concern considering the "negative inflation" expectations by the ECB due to falling oil prices, the advance Eurozone December consumer price index will also be released. Today's report from Germany saw year ago prices only rise by 0.1%. Prices in the Eurozone are expected to decline by 0.1% from a year ago after rising 0.3% in November. Lastly, investors will be paying attention to the monthly release of the Swiss National Bank's (SNB) foreign currency reserves. Last month, the SNB lowered its interest rates into the negative and reiterated strongly that it had been buying foreign currencies to help defend its EURCHF FX peg of 1.20.

The only major earnings report scheduled in the US tomorrow is from Monsanto (MON).

Twitter: @Minyanville

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No positions in stocks mentioned.

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