Ambiguity over whether the Federal Reserve would introduce additional monetary stimulus and bleak jobs data dragged the benchmarks down yesterday. These concerns meant that markets suffered one of their worst falls in a month, which came just a day after the Street interpreted Fed minutes as suggesting that the third of quantitative easing was arriving soon. However, comments from a Fed official were less than optimistic and created ambiguity. While all of the 10 S&P 500 industry groups finished in negative territory, materials emerged as the worst performer. With just a day more to go for end of the week, the S&P 500 seems to be heading for its first weekly loss after six weeks of gains as of now.
The Dow Jones Industrial Average (DJI) incurred a triple digit loss after many days, as it slumped 115.30 points or 0.9% to close the day at 13,057.46. The Standard & Poor 500 (S&P 500) dropped 0.8% and finished yesterday’s trading session at 1,402.08. The tech-laden Nasdaq Composite Index lost 0.7% and was down to 3,053.40. The fear-gauge CBOE Volatility Index (VIX) jumped 5.6% and settled at 15.96. Consolidated volumes on the New York Stock Exchange, Nasdaq and the American Stock Exchange were roughly 5.23 billion shares, lower than the daily average of 6.62 billion shares. Declining stocks outpaced the advancers on the NYSE; as for 66% stocks that declined, 30% stocks ended in the green.
Investors’ cheer over interpreting the Fed minutes as suggestive of QE3 faded soon. On Wednesday, minutes from the Federal Reserve Open Market Committee noted: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery". These comments sparked off optimism and helped benchmarks recover from losses made earlier on Wednesday.
However, St. Louis Fed President James Bullard created uncertainty about additional economic stimulus arriving anytime soon saying that the present economic situation does not warrant the need for QE3. Commenting on the Fed minutes, he termed them as ‘stale’. Speaking to CNBC he said: “If we were to resume, and I think we will, 2 percent growth, maybe a bit stronger than that in the second half of the year, unemployment ticks down through the rest of the year, that's not a great outcome but that's a good enough outcome to keep us on hold”. "I think the markets have the idea of some gigantic action. I'm not sure if the data really warrants that,” he added.
Incidentally, the day when Fed minutes hinted at “many members” voicing their support for the QE3, housing data had showed signs of improvement. But now when St. Louis Fed President downplayed the need of the stimulus measures, the initial claims report was a big disappointment.
According to the U.S. Department of Labor, the advance figure for seasonally adjusted initial claims came in at 372,000 for the week ending August 18, up 4,000 from prior week. The initial claims were also higher than the consensus estimate of 367, 000. This data combined with dismal comments from the St. Louis Fed President dented the mood and eventually dragged the benchmarks down.
However, the housing market showed signs of improvement yet again with the U.S. Census Bureau and the Department of Housing and Urban Development reporting that sales of new single-family houses jumped 3.6% from June to a seasonally adjusted annual rate of 372,000 in July. The data also outpaced projections as the consensus estimates stood at 365, 000.
Looking beyond domestic borders, things did not look optimistic on the Chinese front either. The preliminary HSBC China Manufacturing Purchasing Managers Index was down to its lowest in nine months. The index dropped to 47.8 in August, as against 49.3 in July. While the index remained below 50, it was the 10th straight time that the gauge of manufacturing activity suggested a contraction.
While the benchmarks suffered losses yesterday, the materials sector was among the biggest losers. The Materials Select Sector SPDR (XLB) plunged 1.7%. Among the stocks, Caterpillar Inc. (NYSE:CAT), Alcoa Inc. (NYSE:AA), The Dow Chemical Company (NYSE:DOW), Eastman Chemical Company (NYSE:EMN), Reliance Steel & Aluminum (NYSE:RS), Potash Corp./Saskatchewan (USA) (NYSE:POT) and BHP Billiton Limited (ADR) (NYSE:BHP) dropped 1.2%, 2.7%, 1.4%, 0.6%, 1.5%, 2.8% and 0.9%, respectively.