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Poor Retail Sales Report and Bank Earnings Shock the Market

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

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Global markets were roiled again today. A major culprit for the volatility was the US December retail sales report release in the morning, and earnings from JPMorgan (JPM) and Wells Fargo (WFC).

Early this morning, the European Advocate General Pedro Cruz Villalon said in a preliminary non-binding legal opinion that the ECB's Outright Monetary Transaction (OMT) program is legal within the bounds of the treaties of the European Monetary Union (EMU). A final decision will be made in four to six months. Today's decision should open the way for ECB President Draghi to pursue a broader asset purchase program into sovereign or corporate bonds as early as the central bank's meeting next week.

December retail sales in the US fell by 0.9% from the prior month, compared to an expected decline of 0.1%. The drop was also seen in the "control group," which declined by 0.4% versus expectations of a 0.4% increase. This indicates that the drop in sales, on a nominal basis, were widespread. It is possible that the drop could be due to a reduction in prices and not solely a slowdown in unit sales.

In the afternoon, crude oil jumped more than 5% in a span of 30 minutes shortly before the pit close at 2:30pm ET. The rally was most likely linked to the options expiration for the front month crude oil future and the monthly rebalancing for Goldman Sachs' commodity indices. West-Texas intermediate crude oil finished the day up 5.46% for its first meaningful rally of the year. Before today it had been down 13.54%.

Copper was also down big again today, losing 5%, and is down 7.61% over the past two days.

The reaction to both JPMorgan and Wells Fargo's earnings were negative. JPMorgan CEO Jamie Dimon said on the analyst conference call that the bank is under attack from regulators and expects several more billion in legal costs before things return to normal. Additionally, it did not see big exposure from the drop in oil prices. It shares ultimately finished down 3.5%. Wells Fargo beat on most margins, but saw a decline in new mortgage originations in the quarter and increasing pressure on its net interest margin (NIM). The bank's shares finished down 1.16%

The S&P 500 (SPX) had another wild day and ultimately finished the session down 0.58%. In the pre-market, futures fell as much as 26 points following the retail sales report, before recovering slightly by the time the equity markets opened. However, selling persisted throughout the morning and the SPX was down as much as 1.71% before the late-day rally in crude oil pushed prices higher. Financial stocks were the worst performing sector today, followed by consumer discretionary, due to the economic and earnings reports.

Treasuries rallied due to the above-mentioned factors. The 30-year Treasury yield made a new record low at 2.39% before retracing higher by 7bps later in the day. The Treasury sold $13 billion of bonds at a new record low issue yield of 2.43% in the afternoon, which was a partial cause for the selloff.

Tomorrow's Financial Outlook

Because of the string of economic and company level reports recently that indicate the weakness in the energy sector has spread to the rest of the economy. As such, the forward looking manufacturing surveys tomorrow and producer price index will draw a much higher level of scrutiny than normal. Additionally, earnings reports will begin to accelerate tomorrow, with larger tech and financial companies up first.

The regional New York and Philadelphia manufacturing surveys are expected to show a continued moderation of growth. Overall input producer prices are expected to accelerate their decline to 0.4% from 0.2% in the month prior. Lastly, weekly jobless claims will be reported with little change expected.

Overseas, the major overnight report is Australian employment figures for the month of December. In the early morning, Germany will report its final GDP figure for 2014 and the broader eurozone will report its trade balance.

The list of major US companies reporting tomorrow include Blackrock (BLK), Lennar (LEN), Bank of America (BAC), Citigroup (C), PPG Industries (PPG), Schulmberger (SLB), and Intel (INTC). 


Twitter: @Minyanville

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