U.S. and European equities were hit hard on Thursday after the European Central Bank merely extended its bond buying purchase program through 2017 (more was expected), while Federal Reserve Board Chair Janet Yellen continued to bolster the case for a December interest rate hike (which hasn’t happened since 2006). Weak economic data contributed as well.
The combined result resulted in big-time volatility in currencies with the PowerShares U.S. Dollar Index Bullish Fund (UUP) suffering a 2.4% decline — its worst one-day result since March 2009.
In the end, the Dow Jones Industrial Average lost 1.4%, the S&P 500 lost 1.4%, the Nasdaq Composite shed 1.7% and the Russell 2000 fell 1.8%.
The Dow Jones has now closed back below its 200-day moving average as the $18,000 level — which was first crossed last December — proves an intractable resistance level. Treasury bond weakened while commodities benefited from the dollar’s weakness. Gold gained 0.4% while crude oil rose 3% to close at $41.15 a barrel.
Volatility and fear was in the air, with the VelocityShares 2x VIX (NASDAQ:TVIX) position recommended to Edge subscribers posting a one-day gain of 13.2%. Gold and silver stocks were on the move as well, which lifted the Dec $18 Newmont Mining Corp (NYSE:NEM) calls recommended to Edge Pro subscribers.
Healthcare stocks led the decliners with a 2.2% loss, followed by energy down 2%. Defensive consumer staples and utility stocks limited their falls to 0.5% and 0.9%, respectively. Troubled retailer Sears Holding Corp (NASDAQ:SHLD) lost 6.9% after reporting third quarter comp-store sales down 8.6%, with more than half coming from weakness in apparel and consumer electronics. Pandora Media Inc (NYSE:P), meanwhile, lost 11.5% after announcing a $300 million convertible note offering.
Yellen’s remarks before Congress’ Joint Economic Committee largely repeated Wednesday’s speech to the Economic Club in Washington D.C. — talking up rising confidence that inflation is set to return to the Fed’s 2% inflation target over the medium-term thanks to labor market gains and the diminishing impact of lower energy and import prices.
This confidence, as you’ll remember, was the critical ingredient missing during the September “no hike” policy decision. She also repeated a warning of the consequences of the Fed waiting too long to start tightening policy, risking falling behind rising inflation requiring a more aggressive pace of rate hikes that could damage the economy.
Crude oil traded near $45 a barrel in January, not far from current levels. A modest rebound could push energy inflation back into positive territory in just a few weeks’ time. So keep an eye on that.
In Europe, the ECB cut its deposit rate deeper into negative territory (0.1% to -0.30%) in line with estimates but less than the whispers of a 0.2% cut. The asset purchase program was extended by six months (through March 2017).
But investors frowned upon the unchanged monthly purchase rate of $66 billion, sending the euro up strongly and pushing Germany’s DAX stock index down 3.6% in a return to early November levels. Yellen felt compelled to comment on the market reaction, saying investors had expected ECB actions that were apparently not forthcoming.
On the economic front, the ISM non-manufacturing index declined to 55.9 from 59.1 in October, below the consensus expectation of 58.2. New orders dropped to 57.5 from 62.0. Respondents to the survey commented on a weaker sales outlook, impacts from Obamacare-related costs, and sluggish year-over-year revenue growth.
This adds to recent softness in durable goods, factory orders, and ISM manufacturing activity suggesting the economy is hitting an air pocket just as the Fed is considering raising the cost of credit for the first time in nearly a decade.
No wonder investors are balking.
Friday will feature a closely watched OPEC production decision. No change is expected, but a continuation of today’s dollar selloff could see energy prices enjoy some long delayed support.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
