Strengthening U.S. dollar and a slump in oil prices dragged benchmarks lower on Friday. US crude prices dropped to their lowest levels since Jan 28. Meanwhile, declines in producer prices and consumer confidence added to the bearish sentiment. Benchmarks also posted losses for the third straight week, mostly spooked by sooner-than-expected rate hike fears.
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The Dow Jones Industrial Average (DJI) declined 0.8% to close at 17,749.31. The Standard & Poor’s 500 (S&P 500) lost 0.6% to 2,053.40. The tech-laden Nasdaq Composite Index closed at 4,871.76; decreasing 0.4%. The fear-gauge CBOE Volatility Index (VIX) gained 3.8% to settle at 16.00. A total of about 3.5 billion shares were traded on Friday on NYSE. Decliners outpaced advancing stocks on the NYSE. For 67% stocks that declined, 29% advanced.
Benchmarks ended the last trading day of the week in the red after a stronger dollar raised concerns about corporate earnings. A stronger dollar hampers U.S. export companies by making their products costlier and decreases the profits earned in other currencies.
The dollar strengthened on Friday on speculation that the currency was oversold. The euro plunged to a new 12-year low against the dollar on Friday. The euro dropped to $1.0462, its lowest level since Jan 9, 2003, before closing at $1.0496. The U.S. dollar index gained 1.22% to 100.32 on Friday, a level last touched on Apr 2003.
Strengthening U.S. dollar weighed on oil prices. Additionally, the International Energy Agency (IEA) said global crude oil supply was in excess of demand. The energy watchdog said U.S. oil production went up 115,000 barrels a day in February. Rise in oil production “may soon test storage capacity limits”, resulting in further weakness in oil prices.
U.S. crude oil inventories are already at record level for this time of the year at 448.9 million barrels. The prices of WTI crude oil and Brent crude oil nosedived 4.9% and 4.4% to $44.84 per barrel and $54.67 a barrel, respectively. Drop in oil prices had a negative impact on the Energy Select Sector SPDR (XLE), which declined 0.4%.
The Utilities Select Sector SPDR (XLU) was the biggest loser among the S&P 500 sectors. The sector declined 1%. Key stocks from the sector including The AES Corporation (AES – Analyst Report), Duke Energy Corporation (DUK – Analyst Report), Ameren Corporation (AEE – Analyst Report) and Southern Company (SO – Analyst Report) decreased 1.5%, 0.9%, 1.5% and 1.2%, respectively. All the 10 S&P 500 sectors registered losses on Friday.
Economic data was disappointing on Friday. Wholesale prices dropped for four straight months in February. According to the U.S. Department of Labor, the Producer Price Index (PPI) declined 0.5% in February, in contrast to the consensus estimate of a 0.3% advance. The core PPI also fell 0.5% in February, compared to the consensus estimate of 0.1% gain.
Additionally, consumer sentiment dipped in March. The University of Michigan and Thomson Reuters’ preliminary reading of consumer sentiment declined in March. The gauge was at 91.2 in March, which was in contrast to the consensus forecast of an increase to 95.5.
For the week, the S&P 500, the Dow and the Nasdaq declined 0.9%, 0.6% and 1.1%, respectively. Benchmarks ended the week in negative territory as investors remained concerned about the possibility of a mid-year interest rate hike. Strong labor market conditions injected fears among investors that the Fed may raise interest rate sooner-than-expected. Analysts also believe the Fed will start the rate hike process by dropping the ‘patient’ phrase after the upcoming Federal Open Market Committee (FOMC) meeting that is scheduled to begin on Mar 18.
Concerns about rate hike continued to strengthen the U.S. dollar against major currencies. Continuous decline in euro raised the possibility that the two currencies are moving towards parity in the not-too-distant future. The European Central Bank’s (ECB) quantitative easing program is cited to be the most important factor behind the euro slide.
Among the positives, financial stocks posted solid gains on Thursday after Fed’s stress tests. The Federal Reserve approved the capital plans of 28 financial institutions out of 31 in the Comprehensive Capital Analysis and Review (CCAR). These banks now have the freedom to raise dividends and buy back shares. Moreover, gains among technology and industrial stocks helped benchmarks start the week on a positive note. New deal between Alcoa Inc. (AA – Analyst Report) and RTI International Metals, Inc. (RTI – Snapshot Report), and US, Simon Property Group Inc. (SPG – Analyst Report) and The Macerich Company (MAC – Analyst Report) also helped benchmarks end in the green on the sixth anniversary of the bull market.
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