U.S. equity markets were solidly lower on Friday as traders’ hopes for a year-end rally faded.
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The Dow Jones Industrial Average lost 367 points, or 2.1% to 17128. The S&P 500 declined 36 points, or 1.78% to 2005, while the Nasdaq Composite shed 79 points, or 1.59% to 4923.
Financials and technology declined the most on the session as all 10 S&P 500 sectors closed in negative territory. All three major averages posted red ink for the week, and the Dow clinched its third weekly decline in the past four weeks.
Hopes for a year-end rally have nearly been popped thanks to a lack of momentum surrounding positive reaction to Wednesday’s decision by the Federal Open Market Committee to raise short-term U.S. interest rates for the first time in nearly a decade. In the two days following the central bank's announcement, the Dow retreated 620 points.
Friday brought with it quadruple witching, or the expiration of various stock index futures, stock index options, stock options, and singe stock futures, which helped increase volatility and volume on Wall Street.
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IG market analyst Joshua Mahony said jitters following a selloff in the prior session combined with hopes for a so-called Santa Claus rally slipping away didn’t help matters much during the session.
“Today market the end of a busy month for many, with volumes likely to begin fading as we move closer to the bank holidays of Christmas…that being said, there is a clear possibility that traders could continue to trade through the holidays,” he said.
Focus also remained on the commodities narrative on the heels of an early-morning drop in oil which saw U.S. crude hit $34.41, the lowest price since February 18, 2009. Weighing on investor confidence is continued worries about a global supply glut that won’t melt away. But despite the early move lower, prices recovered in midday action, and traded significantly to the upside.
In recent action, West Texas Intermediate Crude prices settled 0.6% lower at $34.73 a barrel, while Brent, the international benchmark, was down 1.1% to $37.19 a barrel.
Peter Kenny, independent market analyst, noted that quadruple witching may also have played a part in Friday’s oil-market volatility.
“Crude’s relentless move lower has informed the entire equity landscape in ways that only crude oil can…today is quadruple witching, the last of the calendar year. It is entirely possible that at least some portion of the day’s trade was a function of traders legging into it.”
Despite recent focus on the downward momentum, Credit Suisse global energy research analysts predict a recovery for prices in the second half of next year.
“The ingredients are there: Oil demand is growing and supply is rolling over,” they explained in a note. “The wildcards that could inflict further pain are higher OPEC growth than our forecasts, or economic retrenchment.”
Further, they noted if OPEC continues to keep output at current levels rather than cut production to help put upward pressure on prices, a recovery in American shale could be delayed until into 2017.
“Oil seasonality should help from February to May, but real confidence requires clarity on OPEC production policy, continued demand growth, and further evidence of global supply decline,” the Credit Suisse note read.
Elsewhere in commodities, metals were higher after a substantial decline in the prior session. Gold prices gained 1.5% to $1,065 a troy ounce, while silver jumped 2.93% to $14.11 an ounce, and copper rose 3.18% to $2.11 a pound.
The economic calendar remained light on Friday with no significant releases as Wall Street looked to cap out the week up slightly on the major averages.
Traders on the Street will also keep an eye on budget developments out of Capitol Hill. Separate tax and spending bills are working their way through the legislature, and have until the end of the day before lawmakers adjourn for their holiday recess.
On Thursday, lawmakers sent a bipartisan tax bill and a $1.1 trillion spending bill, which includes a policy initiative to lift a ban on crude oil exports, to President Obama’s desk for approval. If signed into law, it the legislation would avert a government shutdown similar to the one in 2013 that bruised the economy.
Economists at Goldman Sachs say far fewer” fiscal policy changes are expected over the next year since spending authority won’t need to be renewed again until late in 2016.
“With an agreement on FY2017 spending caps already in place, the range of outcomes appears fairly narrow. Likewise, assuming the tax bill becomes law, we would not expect Congress to enact major tax legislation until 2017, when some “extenders” will once again expire and when many members of Congress hope to consider some type of tax reform legislation,” a recent note from the investment bank read.