Markets tumble on negative statistics - 16.10.2014

After Wednesday reports indicated that consumers turned more cautious and cut their spending as evidenced by falling retails sales figure, and the prices received by US producers fell for the first time in more than a year, investors responded by selling stocks and buying safer Treasury bonds. During the volatile trading session the S&P 500 dipped into the negative zone for the year before rebounding, and on intraday basis recorded a 9.8% decline from peak to trough before closing down 15.21 points, or 0.8%, to 1,862.49. The Dow Jones Industrial Average; fell as much as 460 points in intraday trade, but finished down 173.45 points, or 1.1%, to 16,141.74. The report from the US Commerce Department said retail sales, which account for one-third of consumer spending, fell 0.3 percent in September, the first decrease since January. The disappointing sales figure together with no signs of picking inflation speak for continued weakness of recovery and mean that the Fed will most likely keep interest rates at their current low level until late 2015 to support the economy.

Amid concerns over weak German economy, slowdown in China and fear of deflation indicated by falling oil prices, investors in Europe cut their exposure to risky assets resulting in a stock market slump. Germany’s DAX 30 index tumbled 2.8% to 8,571.95 on Wednesday, the lowest close since October last year. France’s CAC 40 slid 3.6% to 3,939.72. The Stoxx Europe 600 index dropped 3.2% to 311.36, and marked an 11% fall from its 2014 closing high of 349.71, reached four months ago on June 10. The most recent closing high was 348.89, reached on September 4. Since then, the benchmark has declined 10.8%. This sharp decline came after last week’s losses after disappointing statistics from Germany indicated possibility of recessionary developments in euro zone. As the euro zone economies have not posted any gains in economic activity in response to European Central Bank’s monetary stimulus programs, ECB President Mario Draghi has called on national governments to implement reforms to stimulate economic growth. Market participants fear the ECB’s monetary easing programs using long-term loans to banks, and ABS purchases will fail to boost growth. There is no agreement between governments on appropriate policies as Germany wants structural reforms in Europe, and on the other side, Italy and France want the ECB to do Quantitative Easing. The outlook is uncertain, as there are no signs that Germany will agree to Quantitative Easing, and France and Italy don’t seem ready to implement unpopular structural reforms in labor markets that could push unemployment higher in short term.

Today at 11:00 CET euro zone Consumer Price Index yoy will be published, the outlook is neutral. At 14:30 CET Continuing Claims and Initial Jobless Claims for the weeks ended October 4 and 11 respectively will be released in US. The tentative forecast for Initial Claims is negative. At 15:15 CET he Federal Reserve's monthly index of Industrial Production for September will be released. The outlook is positive, with expected 0.4% expansion of production in September. At 16:00 CET the general business conditions index of the Philadelphia Fed's Business Outlook Survey for October will be released.

Brent for November settlement, which expires today, dropped as much as $1.06, or 1.3 percent, to $82.72 a barrel on the London-based ICE Futures Europe exchange. The more-active December contract was down 69 cents at $83.43. The European benchmark crude was at a premium of $2.35 to WTI. Futures prices declined for the seventh time in eight days. Crude inventories in the U.S., the world’s biggest oil consumer, expanded by 10.2 million barrels last week, the industry-funded American Petroleum Institute in Washington reported yesterday. The International Energy Agency in Paris in its monthly report on October 14 revised downward the rise of global oil demand this year from 900,000 barrels a day to 650,000, the slowest growth since 2009. OPEC members cut prices in the fight for market share and there is no indication a decision will be made to cut output soon. On this backdrop Bank of America Corp. and BNP Paribas SA predict crude will trade above $80 a barrel, while Commerzbank AG sees that level as a possible low for Brent. They’re in part counting on OPEC to reduce output, possibly as soon as next month, to compensate for shrinking demand.