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Further Decline in Crude Oil Sparks Sell Off in Stocks


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

Global risk assets traded higher in the hours before the US equity trading session opened, but that changed as soon as the opening bell rang. In the pre-market, S&P 500 (SPX) index futures had risen by 13 points. However, these gains slowly ebbed away before the 9:30am opening. When the market opened the SPX quickly lost 30 points and traded down more than 1%, with European equity indices following it lower. Stateside prices stabilized from that point as the selling appeared to originate from European sources.

The major negative catalyst today was the drop in crude oil. Both West-Texas intermediate and Brent crude oil futures resumed their decline - falling by more than 5% each in today's session - after stabilizing at the end of last week. The price of one barrel is now down 14.08% year-to-date to $45.75. The main catalyst cited was the oil price forecast downgrade from Goldman Sachs. On Sunday, Goldman lowered its oil forecasts for the next 3, 6, and 12 months to near $40 and believes that it needs to stay at or near that level for the first half of the year in order to keep capital sidelined, which in turn would cut production.

Energy stocks were by the far the worst performing sector today in the S&P 500. The sector fell  2.80% with all but one stock closing negative. Utilities and telecom rose, helped by falling US Treasury yields. The 10-year yield fell by 4bps to 1.905% and is approaching the low from last week of 1.885%. Even though the energy sector was so hard hit, the small cap Russell 2000 (RUT) outperformed the SPX by a half percent on a beta-adjusted basis in today's session.

Alcoa (AA) became the first major US company to report fourth quarter earnings. The company beat estimates handily and traded up in the post-market. It continues to see 7% aluminum demand growth in 2015, the same as it saw in the past year. It saw strong growth continuing in the US, although the European market is expected to decline.

Tomorrow's Financial Outlook

There are two minor US economic reports scheduled to be reported tomorrow - November labor market openings and the December monthly US Treasury budget statement. Neither should be significantly market moving. Recently, while job openings have increased in the US, the amount of new hirings has not, which could be viewed as a marginally negative signal on the health of labor market.

Both Japan and China will report their trade balances overnight with export growth expected in the latter. In the early morning, the UK will report its December consumer and producer prices. Similar to Europe and the US, consumer prices are expected to fall heavily. Last Friday, Norwegian consumer prices were negatively affected across the board from the drop in petrol prices.

Two more earnings reports are scheduled for tomorrow from KB Home (KBH) and CSX (CSX). KB Home will be the first major homebuilder to report their quarter.

Twitter: @Minyanville

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No positions in stocks mentioned.

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