S&P 500

S&P 500 and U.S. Dollar Dive Following Big Drop in Crude Prices

Witawat (Ed) Wijaranakula, Ph.D.
Fri Nov 4, 2016

The S&P 500 tumbled 1.90% for the week, to close on Friday at 2,085.18, led to the downside by weakness in the Information technology, Telecommunication services and Energy sectors. Shares of Facebook (NYSE:FB) were hammered, down 8.03% for the week, as investors were spooked by a comment during the earnings call that limits on “ad load” would result in slower revenue growth in the current quarter, meaning Facebook might have already maxed out the ratio of ads to organic posts in people’s feeds. Shares of CenturyLink (NYSE:CTL) took a 24.15% nosedive for the week after the company said it will acquire Internet backbone provider Level 3 Communications (NYSE:LVLT) in a deal valued at $34 billion.

The Commerce Department said on Monday that consumer spending increased 0.5% in September month-on-month, following a downwardly revised 0.1% decline in August. Economists polled by Reuters had forecast consumer spending rising 0.4% last month. The government also said that the core PCE price index, excluding food and energy, rose a seasonally adjusted 0.1% to 111.78 in September, from 111.66 in August, a 1.7% increase from a year ago. 

The U.S. Labor Department reported a disappointing October nonfarm payrolls report on Friday, showing a seasonally adjusted increase of 161,000 jobs that missed Wall Street economists' median forecast of a 175,000 gain. The government revised September’s number from 156,000 to 191,000, while August's number was raised to 176,000 from 167,000. The U.S. unemployment rate dipped to 4.9% in October, as the civilian labor force participation rate dropped to 62.8%, meaning some 94.6 million Americans are not in the labor force. The number of people who are not in the labor force but want a job now, decreased slightly to 5.91 million in September from 6.09 million registered in September.

Total nonfarm payrolls growth now stands at 1.73% year-on-year to 144.61 million during the third-quarter 2016, the slowest since the second-quarter 2014. One can argue that slow growth in total nonfarm payrolls could be due to the lack of qualified workers, as the labor market approaches maximum employment, which is vaguely defined by the Fed. 

For the week, the U.S. dollar index dove 1.28%, to close at 97.088 on Friday. The yield of 10-year U.S. Treasury Notes sunk 3.76% for the week to close at 1.79%, while the yield spread between the 10-year and 2-year U.S. Treasury Notes narrowed to 0.99 percentage points. The 10-year JGB yield slumped 36% for the week to negative 0.060 at the close on Friday, while the 10-year German bund yield dropped 20%, to close at 0.135%.

The WTI crude price tumbled another 9.51% this week, to close at $44.07 per barrel on Friday, while the Brent crude spot price tanked 8.51% to close at $46.36 per barrel, after the EIA U.S. oil inventory report showed its largest weekly inventory build, a 34-year record high. Crude prices continued to move lower earlier Friday after Reuters reported that Saudi Arabia threatened to raise output if other members didn’t agree to cuts. 

Technical talks between OPEC member top officials, at the OPEC Vienna headquarters on October 28 and 29, went nowhere and ended without reaching any deals. Ministers from the group will meet at the OPEC summit in Vienna on November 30 to finalize the agreement on an oil output freeze. According to Bloomberg, Goldman Sachs Group Inc. sees little probability of an agreement at the meeting, while Bank of America Merrill Lynch and Citigroup Inc. say an accord is likely.

The EIA weekly U.S. oil inventory report on Wednesday showed that domestic crude supplies increased by 14.4 million barrels to 482.6 million barrels, excluding the Strategic Petroleum Reserve, in the week ending October 28, compared to S&P Global Platts analysts’ expectations for a rise of 1.9 million barrels. The American Petroleum Institute (API) inventory data on Tuesday showed a U.S. crude inventory increase of 9.3 million barrels. 

Separately, the EIA said the weekly U.S. crude oil production increased by 18,000 barrels per day (bpd) for the week ending October 28, to 8.522 million bpd. Weekly U.S. crude oil output has fallen about 11.32% from the peak level of 9.61 million bpd during the week ending June 5, 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count rose by 9 to 450, compared to 316, when the rig count hit the low on June 6, 2016. 

The WTI crude broke down the 50.0% Fibonacci retracement level at $44.32 per barrel on Friday and bounced off the 200-day SMA. The crude price could test the 38.2% Fibonacci retracement level at $40.00 per barrel next week if there is still no consensus on an output freeze from OPEC and Russia before the Doha meeting on November17.

The best performing S&P 500 sectors for the week were Materials, Utilities, and Industrials down 0.64%, 1.12% and 1.13%, respectively. The worst performing sectors for the week were Information technology and Telecommunication services down 2.87% and 2.29%, respectively.

S&P 500 Summary: +2.02% YTD as of 11/04/16
Barclay Hedge Fund Index: +4.17% YTD 

Outperforming Sectors: Energy +11.43% YTD, Utilities +10.54% YTD, Information technology +7.79% YTD, Materials +6.40% YTD, Industrials +5.26% YTD, Telecommunication services +2.90% YTD, Consumer staples +2.05% YTD,

Underperforming Sectors: Financials +0.33% YTD, Consumer discretionary –1.95% YTD, Healthcare –7.69% YTD, Real Estate –10.32% YTD.


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