After the Close
The futures markets were in the red this morning, as a swift increase in the price of oil occurred due to an attack on Saudi Arabian production. Around 19 strikes at two facilities have eliminated about 5.7 million barrels of oil per day from the global market, or roughly 5% of worldwide oil production. The price of oil was up as much as 20% at one point in the overnight session, while the stock market fell with that development. However, both these moves had reversed some by the time the opening bell rang. The Dow Jones Industrial Average was down around 125 points in the first few moments of trading, while the other indices were lower in tandem. The markets then traded sideways for much of the day, making little progress in either direction. Overall, the Dow snapped an 8-day winning streak and closed down 143 points, the S&P 500 was lower by nine points, and the NASDAQ fell 23 points.
Though the market wound up in the red, market breadth was neutral, as advancers and decliners were about even for the session. Energy stocks were among the best performers on the day, while materials stocks were among the weakest.
In commodity news, oil prices ended the day significantly higher. Traders are now expecting it to take several weeks for Saudi Arabia to resume full production. Meantime, U.S. Treasury Bond yields were lower today, as a flight to the safe-haven assets occurred. The VIX Volatility Index was higher as demand for options protection rose.
Looking ahead to tomorrow, all eyes will be on the U.S. Federal Reserve as it starts its two-day meeting to determine interest-rate policy. Currently, the market has been pricing in a 25-basis-point reduction to interest rates when the Fed determines policy on Wednesday. In addition, a few companies, including delivery company FedEx (FDX), are slated to report quarterly results. Overall, we think all eyes will be on the U.S. Federal Reserve, U.S. trade negotiations with China, and any developments in Saudi Arabian oil production.
- John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell
At the halfway point, the month of September has thus far proven constructive for equity investors, but the bulls may be put to the test a bit this morning with some emerging geopolitical concerns over the weekend (see below). Last week, the Dow Jones Industrial Average, the technology heavy NASDAQ, and the S&P 500 Index finished to the upside, delivering respective gains of 1.6%, 0.9%, and 1.0%. Driving equities higher were some encouraging reports on the ongoing trade dispute between the United States and China. The Asian nation pulled back on some tariffs that were scheduled to be implemented, prompting many pundits to think that, along with a similar move by the U.S. at the start of September, may be a positive sign that a deal can be worked out when the two economic powers meet next month. The trade news, combined with the decision by the European Central Bank to loosen the monetary reins last week, provided support for stocks. That said, the sentiment on the ongoing trade disagreement remains highly fluid and can change daily.
On Friday, the U.S. equity market delivered a mixed and mostly uninspiring showing. The Dow 30 finished nominally higher, up 37 points, while the NASDAQ and S&P 500 Index finished a similar percentage to the downside. Overall, there was a nearly even split of up and down arrows among the 10 major equity groups, and the margin between advancing and declining issues was split and razor thin, with more winners than losers on the NASDAQ and the reverse on the New York Stock Exchange. The lack of movement was not all that surprising as investors seemed a bit noncommittal ahead of this week’s FOMC meeting.
The Federal Reserve is set to commence its two-day FOMC meeting tomorrow. The prevailing consensus is that the central bank will again loosen the monetary reins by cutting interest rates 25 basis points. Our sense is that any deviation from such a decision would prompt some selling. But given the recent international worries and slowing global growth, we think the Fed will cut rates on Wednesday afternoon. It is worth noting that the pricing data released by the Labor Department last week showed some signs of inflation, which, looking further out, may cause the lead bank to have some pause with regard to cutting rates further.
As noted above, there was some geopolitical news over the weekend that may unnerve investors a bit. Specifically, explosive drone attacks on Saudi Arabia’s biggest crude processing facility cut Saudi Arabia oil output in half on Saturday, to five million barrels per day, Iran-backed Houthi rebels claimed responsibility for the Saudi attack. It led to swift responses from President Trump, who authorized the release of oil from Strategic Petroleum Reserves, and followed that up by saying that the U.S. is "locked and loaded depending on verification" of who the culprit is. Secretary of State Mike Pompeo blamed Iran for the Saudi oil attack, but Tehran denied any involvement. U.S. crude oil prices surged on the news. The higher oil prices, which are up nearly 10% this morning on the New York Mercantile Exchange, are not ideal when the global economy is slowing. It can make running many businesses more costly.
With less than an hour to go before the start of the new trading week stateside, the U.S. equity futures are not surprisingly down this morning on the aforementioned geopolitical tensions. Likewise, it has been a sea of mostly red ink around the globe. The main indexes in China finished in negative territory overnight, while the major European bourses are lower, as trading enters the second half of the session on the Continent. Stay tuned.
– William G. Ferguson
