U.S. equity markets pared losses of more than 2% on Thursday after a report surfaced that OPEC members could be ready to agree on production cuts.
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The Dow Jones Industrial Average pared losses of more than 400 points, ending down 255 points, or 1.60% to 15659. The S&P dropped 22 points, or 1.23% to 1829, while the Nasdaq Composite declined 16 points, or 0.39% to 4266. For a brief period, the tech-heavy index turned green before capping the day in negative territory.
Financials and health care led the declines, while the telecom traded in positive territory, and energy significantly scaled back heavy losses, though it ended in the red.
In a volatile trading day on Wall Street, U.S. equities, at one point, halved sharp losses from early in the session after a report from the Wall Street Journal cited the United Arab Emirates energy minister as saying members of the Organization of the Petroleum Exporting Countries are “ready to cooperate on a cut, but current prices are already forcing producers outside the group to at least cap output increases.”
Before the report, West Texas Intermediate crude prices dropped to $26.05, their lowest level since May 2003. The commodity settled down 4.52% to $26.21. Brent, the international benchmark, reached $30.06 at settlement time, down 2.53% for the session.
Scott Cockerham, managing director of Conway MacKenzie Capital Advisors, cautioned against too much exuberance around talk of possible cuts to OPEC output.
“Saudi Arabia can endure years of anemic revenue, which it likely won’t have to do, in order to harvest market share. It even has another 2.5 million barrels per day in excess capacity. Additionally, Iran is incentivized to grow market share as it emerges from sanctions. The market is not pricing in a potential cut, which is interesting,” he said.
Wall Street had suffered a sharp selloff on Thursday, extending a rout in global markets, after Sweden’s central bank slashed interest rates further into negative territory, and Federal Reserve Chief Janet Yellen discussed again the possibility of negative interest rate policy (NIRP) in the U.S.
In her remarks to the Senate Banking Committee, Yellen said the central bank has not ruled out negative rates as a tool to help boost inflation in the nation.
“We’re taking a look at them again because we’d want to be prepared in the event we would need to add more accommodation. We haven’t finished that evaluation...I wouldn’t take [negative rates] off the table,” she said during the question and answer period of the testimony.
She later said it’s not the “most likely scenario.”
Larry Shover, chief investment strategist at Solutions Fund Group, said it can't be overstated how "detrimental" negative interest rates are for market action.
"They are destroying bank stocks and in turn killing the market. Negative rates appear to be the preferred policy choice of central banks and this has played a key role in crushing bank stocks over the last several weeks," he said.
Diverging with global trends, the Fed in December moved to raise rates by 0.25 percentage point, the first rise in nearly a decade, citing improved labor market conditions and inflation nearing a 2% target.
However, the central bank kept rates on hold in January despite intentions in December to raise rates at least four more times in 2016. Yellen said the Fed is keeping a close eye on global market conditions and fresh U.S. economic data.
Meanwhile, on Thursday, Riksbank, the Swedish central bank, moved to cut its benchmark interest rate further into negative territory. In a bid to help boost inflation, the central bank lowered its main refinancing rate to -0.5%?from -0.35%, and said it was prepared to drop rates further if necessary.
Riksbank joins other of the world's central banks, including the Bank of Japan and the European Central Bank, in slashing rates below zero.
Shover said it’s hard to imagine a worst start to a trading day in the U.S.
Financial stocks were among the worst performers on the session, and have so far been the worst performers for the year, down more than 15%, and in a bear-market from the highs in July, ahead of Thursday’s open. Worries about how low and negative rates will affect net interest margins weighed on the minds of investors.
Meanwhile, Nasdaq Composite neared bear-market territory, a level of 4185 points or below, as it has so far sustained losses of more than 15% so far this year. The S&P 500 was more than 100 points away from a bear market, while the DJIA would have to shed slightly more than 1,000 points to cross that threshold.
The central bank moves come alongside weak guidance from Societe Generale, which unveiled weak quarterly earnings and downbeat forward guidance.
"The two things markets hate most right now -- negative central bank rates and bad bank headlines --occurred overnight...the combination of those two events, coupled w/very fragile sentiment, extreme risk aversion...Yellen’s testimony (which wasn’t sufficiently dovish...and Cisco’s cautious macro commentary, are weighing very hard on equities so far Thurs morning," Shover said.
As oil and equities plunged, investors rushed to safe-haven assets. Gold prices jumped to their highest level in a year. Prices ended the day up 4.45% to $1,247 a troy ounce. The commodity saw its biggest gain in 14 months.
The yield on the benchmark 10-year U.S. Treasury bond dropped 0.068 percentage point to 1.640%. Yields move in the opposite direction of prices.
Despite the renewed turmoil in global markets, IG market analyst Josh Mahony said in a note it’s important to keep in mind this is not another credit crisis or dot-com crash.
“However, it is clear that we are seeing the biggest crisis of confidence since the height of the 2007/2008 crisis,” he said. “This is despite the fact that the past eight years have seen us battle through significantly more testing issues than are currently being faced – the fiscal cliff, Cyprus, Greece, withdrawal of QE, U.S. government shutdown.”