Global-Growth Worries, Oil Plunge Send Stocks Tumbling

Markets Global Turmoil

U.S. equity markets extended steep losses Wednesday after Chinese data delivered yet another blow to global markets, and oil prices plunged.

The Dow Jones Industrial Average dropped 251 points, or 1.47% to 16906. The S&P 500 shed 26 points, or 1.45%, to 1990, while the Nasdaq Composite eliminated 55 points, or 1.14% to 4835.

All 10 S&P 500 sectors were firmly in negative territory, as energy and materials led the way down.

Today’s Markets

Crumbling crude-oil prices weighed on market sentiment Wednesday after services data from China and the U.S. had investors on edge.

In recent action, West Texas Intermediate crude prices tumbled 5.56% to settle at $33.97 a barrel, the lowest since December 2008. Meanwhile, Brent, the international benchmark, dropped 6.01% to $34.23 a barrel, its lowest settlement value since June 2004.

The fresh drop in oil prices came after inventory update from the Energy Information Administration, which showed an unexpected drawdown in supplies, failed to boost the market as it was offset by significant builds in both gasoline and distillate inventories.

Crude stockpiles declined by 5.09 million barrels last week, while distillate stocks jumped by 6.31 million barrels, and gasoline stockpiles added 10.58 million barrels.

Also weighing on the price of the commodity were mounting tensions between Saudi Arabia and Iran, weak oil-demand figures from China, and developments out of North Korea. The nation, overnight, said it tested a hydrogen bomb.

Wayne Schmidt, chief investment officer at Gradient Investments, said the low oil-price story is likely to continue to be a theme throughout at least the first half of 2016.

“Until something changes on the macro global economic view where business really starts to pick up, this will continue to be the theme,” he said. “I have a hard time seeing the supply and demand of oil coming into balance…as in the short term with Saudi Arabia saying they won’t cut production, maybe Iran does or doesn’t come onto the market. But prices in the high 20s is a real possibility.”

The moves in oil weighed heavily on the energy sector, which was by far the biggest decliner of the 10 S&P 500 sectors, as Chevron alone (NYSE:CVX) clipped 28 points off the Dow Industrials.

Safe-haven assets including gold and Treasury bonds rose as investors looked to less-risky investments. Gold rose 1.16% during the session to $1,090 a troy ounce. The yield on the 10-year Treasury bond fell 0.060 percentage point to 2.190%. As yields fall, prices rise.

Meanwhile, silver declined 0.11% to $13.96 an ounce, while copper shed 0.41% to $2.09 a pound.

Strength of China’s Economy Still Front and Center

Global markets continued to be on edge after another onslaught of weak data overseas as global-growth worries plagued the markets.

On Monday, Chinese manufacturing data showed the tenth-straight month of contraction, while Wednesday brought another round of bleeding, this time thanks to weak service-sector data. The Caixin/Markit services PMI gauge dropped to a 17-month low to a reading of 50.2 last month. The gauge remains in expansion territory but is flirting with the 50 mark that separates growth from contraction.

“Only three days into the new year and both the economic data and equity markets in China are giving investors plenty to worry about,” IG market analyst Alastair McCaig said in a note. “The PBoC has already suspended equity markets, closing them early for the day, injected 130 billion yuan into the markets, and how now weakened the currency. What will the fourth day of the trading year bring?”

Despite the weak data, China’s Shanghai Composite index ended up 2.25% partly due to a surge in resources shares, and as traders hoped a ban on large-scale asset sales would be extended as its six-month deadline nears on Friday. The ban was instituted after last summer’s global-market meltdown as investors and economists tried to put China’s slowing growth figures in context.

Elsewhere in Asia, markets closed to the downside. Hong Kong’s Hang Seng shed 0.98%, while Japan’s Nikkei dropped 0.99%.

Fear spread to European equity markets where shares tumbled. The Euro Stoxx 50, which tracks large-cap companies in the eurozone, dropped 1.25%. The French CAC 40 shed 1.30%, the German Dax declined 1.01%, and the UK’s FTSE 100 fell 1.06%.

Meanwhile, service-sector data was the name of the game in the U.S. Wednesday as well. The Institute for Supply-Management’s gauge of non-manufacturing activity in the nation unexpectedly fell to 55.3 in December from 55.9 the month prior. Wall Street had expected the gauge to tick up to 56.

Meanwhile, factory orders, the Commerce Department reported, slipped 0.2% in November, matching expectations.

Also on the economic calendar was the latest read on private-sector hiring last month. Payroll processor ADP reported that private-sector employment increased by 257,000 jobs, blowing past the 192,000 estimate. Traders paid close attention to ADP’s figures ahead of Friday’s all-important non-farm payrolls report.

The U.S. trade deficit narrowed more than expected in November to $42.37 billion from $44.48 billion the month prior. Wall Street expected the trade balance to shrink to $44 billion.

Finally, investors in the U.S. got an in-depth look at minutes from the Federal Open Market Committee’s December meeting. After two days of policy discussions between members last month, the FOMC opted to hike short-term interest rates from their near-zero range, the first increase in nearly a decade.  The minutes will shed more light on the discussions between central bankers before they voted for the rate rise unanimously.

The minutes showed the decision was a “close call” for central bankers as they tried to balance the pros and cons of the dollar’s appreciation and low commodity prices and their effects on the U.S. economy. The minutes also showed that the central bank is committed to a gradual pace for future rate hikes.

Schmidt said the minutes showed the Fed’s “fairly rosy” view of what the economy will be like in the next year – but he doesn’t necessarily agree with the idea of three or four more hikes before 2017.

“I think it was fine they got off of zero, but I have a hard time seeing where hikes two, three, and four will come from with what’s going on in equities, China, and the global economies,” he said.