S&P 500

Clinton’s EpiPen Tweet and the OPEC Rumor Mill Drag Down S&P 500, While Fed’s Fischer Hawkish Comments Add More Confusion

Witawat (Ed) Wijaranakula, Ph.D.
Fri Aug 26, 2016

The S&P 500 closed at 2,169.04 on Friday, down 0.68% for the week, as the OPEC rumor mill runs out of steam and crude oil prices begin to sag. At 2:02 p.m. EST on Wednesday, August 24, 2016, Hillary Clinton tweeted the following: Hillary Clinton (@HillaryClinton) - EpiPens can be the difference between life and death. There's no justification for these price hikes. https://t.co/O6RbVR6Qim -H. The S&P 500 Healthcare sector tumbled 1.51% and wiped out about $45 billion of its market capitalization after Clinton’s tweet hit the Bloomberg terminal. For the week, the S&P 500 Healthcare sector, one of the worst performers this year, lost 1.80%. 

The speech by Federal Reserve Chair Janet Yellen at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming on Friday was a non-event. After running up 0.71% to an intraday high of 2,187.94, the S&P 500, however, took a U-turn following comments from Stanley Fischer, Vice Chairman of the U.S. Federal Reserve, in an interview with CNBC shortly after Yellen’s speech. Fischer told a CNBC reporter that the central bank could possibly raise interest rates twice before the end of 2016, depending on the strength of economic data released in the coming months.

Many Fed observers believe that Fischer’s comments overshadowed the earlier remarks from Yellen, who said, “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”. The FX market interpreted Yellen’s remarks as the odds of an interest rate hike were roughly even for the Fed's December policy meeting.

The U.S. Dollar index jumped 1.12% for the week, to close on Friday at 95.542, mostly on Friday after Fischer’s comments, while the yield of the 10-year U.S. Treasury Note surged 2.53% to close at 1.62% on Friday. The yield spread between the 10-year and 2-year U.S. Treasury Notes narrowed to 0.78 percentage points at the close on Friday, as recession fears rose. 

The probability of a 25 basis point rate hike at the next FOMC meeting on September 21 jumped to 36.0%, while the probability of a no change in monetary policy stands at 64.0%, based on the CME Group 30-day Fed Fund futures prices as of August 26. From the Fed’s “Dot-Plot”, or the FOMC’s participant survey, the Fed Funds target rate is between 0.75 and 1.0%, meaning two more rate hikes are possibly on the table this year.

The WTI crude spot price tumbled 2.99% for the week, to close on Friday at $47.64 per barrel, while Brent crude dropped 2.24% to close at $49.71 per barrel, despite swirling speculation on Tuesday that Iran may agree to join some OPEC members to potentially freeze production levels at the coming informal OPEC meeting. The speculation came on the heels of reports on Monday about burgeoning Chinese fuel exports and increasing Iraqi and Nigerian crude shipments. Crude prices bounced off the weekly low on Thursday, as traders were speculating that Yellen’s speech on Friday at Jackson Hole would be dovish.

Data on Monday from the General Administration of Customs of China showed that diesel exports rose 181.8% to a record 1.53 million tonnes, almost tripling China's average monthly export volume in 2015. Gasoline shipments were up 145% at 970,000 tonnes, falling slightly from a record 1.10 million tonnes in June. The domestic oil product surplus and rising crude stockpiles could slow down Chinese crude oil imports.

Iraq said on Monday that it will boost crude shipments by about 150,000 barrels per day (bpd) in the coming days following an agreement to resume exports from three oil fields in Kirkuk. The Niger Delta Avengers declared an end to attacks on oil infrastructure in Nigeria and will conduct talks with the government, according to Bloomberg.

The EIA weekly U.S. oil inventory report on Wednesday showed an increase of 2.5 million barrels to 523.6 million barrels, excluding strategic inventories, in the week ending August 19, compared to S&P Global Platts analysts’ expectations for a rise of 200,000 barrels. The American Petroleum Institute (API) inventory data on Tuesday showed a U.S. crude inventory build of 4.64 million barrels for the week. 

Separately, the EIA said the weekly U.S. crude oil production decreased by 49,000 bpd for the week ending August 19, 2016, to 8.548 million bpd. Weekly U.S. crude oil output has fallen about 11.05% from the peak level of 9.61 million bpd during the week ending August 19, 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count was unchanged at 406, compared to 316, when the rig count hit the low on June 6, 2016.

The U.S. Commerce Department said on Thursday that seasonally adjusted manufacturers’ new orders for nondefense capital goods excluding aircraft, or core capital goods, one of the leading indicators of future economic growth and a closely watched proxy for business investment in equipment, increased 1.62% to $63.45 billion last month from $62.44 billion in June, but down 4.86% on a year-on-year basis. Orders for core capital goods have been in recession since the first-quarter 2015. 

With slower growth in the workforce, there has been less need for businesses to buy new equipment. Fed Chair Yellen told the Senate Banking Committee in June 2016, “sales growth has been slow and many firms have found they actually don’t need to invest very much in order to satisfy the demand growth that they’re seeing.”

Overall, U.S. economic growth remains tepid, as the U.S. Bureau of Economic Analysis revised the U.S. second-quarter GDP (second estimate) to 1.1% on Friday, from the previous 1.2%. Higher-than-expected manufacturers' inventories of durable goods prompted the Federal Reserve Bank of New York on Friday to trim its U.S. GDP forecast for the third-quarter of 2016 to 2.8%, from the previous 3.0%. The Federal Reserve Bank of Atlanta also revised their third-quarter 2016 GDP forecast downward to 3.4%, from the previous 3.6%, citing declining real residential investment growth from 1.0% to –2.6%.

The best performing S&P 500 sectors for the week were Financials and Information technology, up 0.36% and 0.04%, respectively. The worst performing sectors for the week were Utilities, Healthcare and Energy down 2.27, 1.80% and 1.34%, respectively. 

S&P 500 Summary: +6.12% YTD as of 08/26/16
Barclay Hedge Fund Index: +2.72% YTD 

Outperforming Sectors: Telecommunication services +14.46% YTD, Energy +14.0% YTD, Utilities +12.89% YTD, Materials +11.46% YTD, Industrials +9.35% YTD, Information technology +8.62% YTD and Consumer staples +7.12% YTD.

Underperforming Sectors: Consumer discretionary +3.36% YTD, Healthcare +1.14% YTD and Financials +0.75% YTD.


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