Severe Drop in Oil Prices Among Catalysts That Knock Down Risk Assets
Today's financial recap and tomorrow's financial outlook.
Three reasons cited for the weakness in risk assets today was dissension at both the ECB and BoJ, and the sharp weakness in crude oil. News reports early this morning indicated that the a substantial number of members on the Bank of Japan's (BoJ) policymaking committee thought that with the recent drop in oil prices, which will likely cause the central bank to lower its inflation forecasts, that it should not mechanically increase its stimulus. On the side of the ECB, a leaked document from the eurozone's upcoming summit indicated that President Mario Draghi does not have the backing of the bloc's fiscal policymakers to embark on an expanded QE program.
After last night's negative API inventory report that showed a substantial pickup in refinery activity and a large increase in supplies, oil prices were lower. The government's inventory report showed a similar uptick in oil supplies over the past week. Additionally, OPEC cut its demand outlook for 2015 by 300k barrels-per-day to 28.7 million (note the group produces 30 million), although this was inline with what many analysts were expecting. Lastly, Saudi Arabia's oil minister was completely nonchalant about the recent drop in prices and made no move to say that the world's largest producer would consider cutting production. West-texas crude oil finished down 4.42% and traded as worse as -5.5% at one point.
All of this sent US equity market indices to their weakest performance since October of this year. The S&P 500 (SPX) closed down 1.64%, led by declines in the energy sector. The Russell 2000 (RUT) was down 2.2%, but was inline with the SPX's performance on a beta-adjusted basis. Other high-beta areas of the market also took beatings, including biotech and social media names. US Treasuries rallied strongly, especially after the auction of 10-year notes at 1pm ET. The 10-year yield finished the day down 5bps to 2.16%.
Toll Brothers (TOL) announced on its earnings call that although it saw a strong spring sales season and a good next year it lacks the pricing power to improve margins. Investors responded very negatively to this news and the stock fell 7.82% during today's session. The sector as a whole was down 3.47%.
Tomorrow's Financial Outlook
Tomorrow morning the US will release retail sales for the month of November. Sales are expected to be strong, up 0.4% from the prior month, although Black Friday sales this holiday season were substantially below the prior year. The report will not include sales from Cyber Monday, which according to American Express recorded the highest single day of sales in history. Also scheduled to be reported are weekly jobless claims, import prices, and business inventories.
There are two major central bank decisions tomorrow. The Swiss National Bank (SNB) and Norges Bank will make decisions and both are expected to act dovishly. The EURCHF FX cross has tested the SNB's 1.20 cap recently because of the ECB's move to set a negative deposit rate of -0.2%. Market participants widely expect the SNB to follow this course and set a negative deposit rate - and it has acknowledged it stands ready to do so. In Norway, forecasters have pulled forward their calls for a rate cut to tomorrow's meeting due to the continued drop in oil prices and production shutdowns in the country. Although the consensus is for no change, a substantial amount of economists think the central bank will cut its rate by 25bps to 1.25% and strongly iterate they are ready to make further cuts. The futures market is currently priced for a cut of 50bps.
Radioshack (RSH), Ciena (CIEN), and Adobe (ADBE) are scheduled to report earnings tomorrow.
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