US stocks fall as oil dives below US$40 a barrel and US Fed looks ready to raise interest rates

A customer at a petrol station in Princeton, Illinois, in 2014.
A customer at a petrol station in Princeton, Illinois, in 2014.PHOTO: BLOOMBERG

NEW YORK (BLOOMBERG) - United States stocks slipped as crude plunged below US$40 (S$56.50) a barrel, sparking a slide in energy producers. Treasuries fell after Federal Reserve chair Janet Yellen signalled increasing confidence in the economy two weeks before central bank officials meet to review policy.

The Standard & Poor's 500 Index extended losses in afternoon trading as the sell-off in oil accelerated before a meeting of Opec members on Friday (Dec 4). Yields on 10-year Treasury notes rose the most in almost a month, while the US dollar hovered near its strongest level in a decade as Ms Yellen's remarks laid the groundwork for the first rate rise since 2006.

As three days of economic events likely to set the course for global markets into 2016 kicked off, the renewed slump in crude oil distracted traders from their focus on the looming divergence in monetary policy, with the Organisation of Petroleum Exporting Countries (Opec) having shown few signs it will vote to trim output. 

Ms Yellen is increasingly confident the US economy is growing, intensifying speculation that the Fed will tighten policy just as the European Central Bank seems poised to expand stimulus. Investors are awaiting Friday's jobs report, the last major US data before the Fed meets on Dec 16.

"Yellen's remarks appear to be reinforcing market expectations of lift-off," said Mr Alan Gayle, senior strategist for Atlanta-based Ridgeworth Investments, which has about US$42.5 billion in assets. "The Fed's actions combined with the ECB is already taking the dollar higher, and it's taking it higher today. This will weigh on the large-cap space."

The S&P 500 lost 1.1 per cent to 2,079.51 by 4pm in New York, its steepest one-day loss since Nov 13. Yields on the 10- year Treasury note climbed four basis points, or 0.04 percentage point, to 2.18 per cent, their first advance since Nov 20. The euro weakened 0.2 per cent as tepid inflation data boosted the argument for extra stimulus. West Texas Intermediate crude futures tumbled 4.5 per cent to settle at US$39.94 a barrel.

The S&P 500 retreated after rebounding the most in almost two weeks on Tuesday, when it closed 1.3 per cent below its record. The index is still up more than 11 per cent from a low reached in August on growing confidence that the economy is sturdy enough to handle higher borrowing costs.

"Yellen didn't say anything miraculous that's pushing the market down, it's just that yesterday was a float up on air," said Mr Yousef Abbasi, global market strategist at JonesTrading Institutional Services LLC in New York "There's a lack of leadership on a day like today, when you're not going to get it from commodities-linked equities like energy or materials."

Energy shares led declines with a 3.1 per cent slide. Chevron Corp and Exxon Mobil Corp fell more than 2 per cent. Technology shares erased earlier gains spurred by Qualcomm Inc and Yahoo! Inc. Materials producers also slumped more than 1 per cent.

European stocks closed little changed as the rout in commodities overshadowed optimism over the prospect of additional central-bank stimulus. The Stoxx Europe 600 Index slipped less than 0.1 per cent to end near a three-month high. In Asia, equities fluctuated, with the MSCI Asia Pacific Index ending Wednesday down 0.2 per cent as South Korean shares slumped.

Bonds Yields on two-year Treasury notes jumped three basis points to 0.94 per cent, with private US jobs data pushing the rate on the policy-sensitive bond to near its highest level since 2010.

The report from the ADP Research Institute showed the US added the most workers in five months in November, indicating non-farm payrolls data due on Friday may be stronger than some analysts expect. The Fed is closely monitoring progress towards full employment in their decision-making over when to raise rates.

The jobs data signals that "we don't have to worry about the Fed getting off track" and leaving rates unchanged this month, said Mr John Briggs, head of strategy for the Americas at RBS Securities Inc in Stamford, Connecticut.

Market-implied odds of the Fed raising rates this month are hovering above 70 per cent, data compiled by Bloomberg based on futures trading shows.

Euro-area bonds rose after the regional inflation data, with yields on Spanish and Finnish debt among those falling to records. Yields on Spain's two-year note dropped to as low as minus 0.05 per cent, while Finland's touched minus 0.39 per cent. The yield on 10-year German bunds, Europe's benchmark sovereign securities, was steady at 0.47 per cent.

The euro has weakened more than 12 per cent against the US dollar this year as the ECB implemented quantitative easing to stimulate the economy, while the Fed moved closer to boosting rates. It touched US$1.0551 on Wednesday, the weakest level since April 14.

Wednesday showed euro-area consumer price growth was unchanged in November, missing analyst forecasts. With ECB president Mario Draghi pledging to do what it takes to reignite inflation in the region's economy, analysts are predicting a bump up in stimulus on Thursday, via a reduction in the deposit rate and an expansion in asset purchases.

"The ECB has clearly signalled they are not willing to tolerate further downside surprises to their inflation outlook going forward," said London-based currency strategist Lee Hardman at Bank of Tokyo-Mitsubishi UFJ. "Today's report solidifies expectations they will be easing policy aggressively."

The Bloomberg Dollar Spot Index, a gauge of the US currency against 10 major peers, rose 0.2 per cent after slipping 0.4 per cent on Tuesday. The yen weakened 0.3 per cent to 123.21 per US dollar.

Oil fell for the third time in four days as Opec ministers arrived in Vienna for a production policy meeting. Prices briefly rose after the Iranian Oil Ministry's Shana news agency said a majority of Opec members agree on an output cut, with the exception of Saudi Arabia and Persian Gulf Arab countries.

US crude supplies rose to 489.4 million barrels last week, the most for this time of year since 1930, government data show. Saudi Arabia will consider all issues at the Friday gathering and listen to the concerns of other group members, Oil Minister Ali al-Naimi said.

Copper declined. The metal for three-month delivery slid 1.3 per cent to US$2.0440 a pound on the Comex, retracing most of an advance from the previous day.

The Bloomberg Commodity Index lost 1.7 per cent on Wednesday, returning to its lowest level since June 1999.

The MSCI Emerging Markets Index dropped 0.5 per cent, after rising the most in almost two weeks on Tuesday. Benchmarks from India to South Africa declined.

The Russian ruble led losses among developing-nation currencies, retreating as oil fell. Egyptian equities jumped most in the world after the central bank repaid money owed to overseas investors.

The Shanghai Composite Index climbed 2.3 per cent, the most in a month, after changing direction at least seven times in the morning before rallying in the last hour of trading.

China's central bank stepped up cash injections via open-market operations on Tuesday as the resumption of new share sales drove demand for funds. Hong Kong's Hang Seng China Enterprises Index, a gauge of mainland Chinese shares listed in the city, increased 1 per cent.