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The S&P 500 tumbled 1.94% on Friday, as investors raised concerns about falling crude oil prices and the U.S. junk bond market. Carl Icahn, activist investor and fund manager of $30 billion Icahn Capital Management, told CNBC that, "The high-yield market is just a keg of dynamite that sooner or later will blow up,". Icahn’s comment came after Third Avenue Management looked to block investors from withdrawing money from its nearly $1 billion junk bond fund that it is trying to liquidate.
The spot WTI crude oil price has tumbled 4.97% since Wednesday, to close on Friday at a six-year low of $35.36 per barrel. The crude price has been on a wild ride since Wednesday, when it jumped 3.01% to an intraday high of $38.99 a barrel, after the U.S. Energy Information Administration (EIA) reported that U.S. commercial crude oil inventories rose to 485.9 million barrels, down 3.6 million barrels in the week ending December 4, compared to the analysts’ expectations of an inventory build of 300K barrels. Traders, however, began selling and pushed the crude price down to close at $37.21 a barrel, falling 4.57% from the intraday high, after realizing that the distillate inventories increased last week by 5 million barrels, double the forecast polled by Reuters.
Tumbling crude oil prices put more of a squeeze on small energy companies that sell high-yield, or junk bonds, to finance their operations. There could be as much as $212 billion worth of U.S. energy junk bonds out there, according to Bank of America Merrill Lynch. Standard & Poor's Ratings Service recently warning that a 50% of energy junk bonds are "distressed," meaning they are at risk of default.
The Fed rate hike will drain liquidity from the market and put more pressure on these small companies, since the risks of bond defaults have risen dramatically. To make matters worse, most junk-bond investors want to get out of their energy-related holdings at the same time. The question to be asked is whether the Fed sees this coming.
The probability of a rate hike at the Fed’s FOMC meeting on December 15-16 based on the 30-day prices of federal funds futures, traded on the Chicago Mercantile Exchange and commonly used to estimate the market’s views on the likelihood of changes in U.S. monetary policy, jumped to 81% from 79% from the previous week, according to data from the CME Group as of December 11.
According to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission
(CFTC) for the week ended December 8, there are 139,008 short positions of S&P 500 consolidated futures, traded on the Chicago Mercantile Exchange
(CME) by leveraged funds, a decrease of 5,588 short positions from the previous week. This is compared to about 86,774 long positions, up 10,053 from the previous week.
The data suggested that hedge funds continued to cut back their short positions resulting in an increase in a net long positions of 15,621 contracts, worth about $7.9 billion, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index. About two months ago, hedge funds held a total of 192,998 short positions of S&P 500 consolidated futures.
Dow Chemical and DuPont, also known as E.I. du Pont de Nemours and Co., said on Friday that have agreed to merge in an all-stock deal valued at $130 billion. The combined company, which will be called DowDuPont, is planning to cut some $3 billion in costs before splitting into three separate businesses, 18 to 24 months after the merger closes, according to The Wall Street Journal. DuPont said it will be cutting its global workforce by 5000+ jobs ahead of the merger. Analysts said the merger could cost up to 20,000 jobs.
A strong dollar and a high corporate tax rate makes U.S. companies less competitive in the global market. Last month, Pfizer said that they would buy Allergan Plc in a deal worth $160 billion, to create the world's largest pharmaceutical company and move its headquarters to Dublin, Ireland. According to KPMG, the United States has the highest 2015 corporate tax rate in the free world, with a 40% rate while Ireland’s corporate tax rate, for example, is just 12.5%.
On Friday, the U.S. Commerce Department reported a mixed bag of retail sales data. Overall retail sales showed a 0.2% rise month-over-month in November, missing the 0.3% increase forecast by economists polled by Reuters. The October data were kept unrevised, while September sales were revised to a 0.1% decrease. The so-called core retail sales, excluding automobiles, gasoline, building materials and food services, came in at a 0.6% increase, better than the expectations of a 0.4% rise.
After the U.S. Commerce Department report, the U.S. dollar index (DXY), a weighted index of the value of the U.S. dollar relative to a basket of six major currencies, was down 0.39% to close at 97.55 on Friday.
More downside risk for the dollar could be coming from the People’s Bank of China (PboC), as the bank set the daily reference at 6.4358 yuan to a dollar on Friday, the lowest since August 5, 2011, according to the PBoC’s China Foreign Exchange Trade System. Since China stunned financial markets by devaluing the yuan in August, the PBoC move would be to sell dollars to support the yuan. Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp, told Bloomberg News that he hasn’t seen any decisive intervention this week, but they may come back in after next week’s FOMC meeting.
The S&P 500 closed at 2,012.37 on Friday, down 3.79% for the week. The best performing S&P 500 sectors for the week were Utilities and Consumer Staples, which were down 1.82% and 1.96%, respectively. The worst performing S&P 500 sectors for the week were Energy and Financials, which were down 6.46% and 4.66%, respectively.
S&P 500 Summary: –2.26% YTD as of 12/11/15
Barclay Hedge Fund Index: +1.15% YTD
Outperforming Sectors: Consumer discretionary +7.81% YTD, Information technology +4.0% YTD, Healthcare +2.3% YTD and Consumer staples +1.11% YTD
Underperforming Sectors: Telecommunication services –4.98% YTD, Financials –5.49% YTD, Industrials –5.94% YTD, Materials –9.83% YTD, Utilities –12.39% YTD and Energy –24.45% YTD |
