Closing Market Summary: S&P 500 Surrenders Year-to-Date Gain
The major averages finished the Thursday session near their lows after renewed concerns surrounding the situation in Ukraine, combined with more warnings signs from China, contributed to participants reducing their risk exposure. The jitters related to China are tied up in economic and financial risk, whereas, the concerns over Ukraine are tied up in geopolitical risk that has the potential to become a global economic problem.
The tech-heavy Nasdaq (-1.5%) led the retreat while the S&P 500 lost 1.2% with eight sectors ending in the red. As a result, the benchmark index settled below its 2013 closing high of 1848.36.
Equity indices began the session with modest ins, but the early strength was short-lived as the S&P 500 notched its high within the first ten minutes of action, spending the remainder of the trading day in a steady slide. Although stocks opened higher, the dollar/yen pair flashed an early warning signal when it began dropping at the start of the New York Session. The currency pair hovered near 102.80, but slumped all the way to 101.60 by the time the closing bell rang.
The yen often draws safe-haven interest in times of geopolitical distress and today's move basically snowballed given carry-trade dynamics that work against yen-based borrowers when the currency strengthens. In turn, the sharp move weighed on risk assets, including US stocks.
Continued worries about the strength of the Chinese economy fed into the risk-off posture after industrial production (8.6% year-over-year versus9.5% expected), fixed asset investment (17.9% year-over-year versus 19.4% expected), and retail sales (11.8% year-over-year versus 13.5% expected) all fell short of estimates. Copper futures have been pressured recently, and continued retreating today. The red metal fell 1.3% to $2.923/lb.
Elsewhere, the dispute between Russia and Ukraine jumped back into focus after Ukraine's acting President Oleksandr Turchynov was quoted by Reuters as saying he believes Russian forces concentrated on Ukraine's eastern border are ‘ready to invade.' The comments were followed by a statement from U.S. Secretary of State John Kerry, who said if the Sunday referendum goes ahead as planned there will be a ‘serious series of steps' taking place on Monday from the United States and Europe.
Notably, Treasuries, which began climbing just after the start of the New York session, accelerated their advance following the remarks from President Turchynov. The 10-yr note added 24 ticks, sending the benchmark yield lower by nine basis points to 2.65%.
Similarly, volatility protection was in high demand as indicated by an 12.1% increase in the CBOE Volatility Index (VIX 16.22, +1.75).
Nine sectors posted losses with cyclical groups bearing the brunt of the weakness. The tech sector (-1.6%) registered the largest decline while industrials (-1.5%) and consumer discretionary (-1.4%) followed not far behind. The underperformance of technology weighed on the Nasdaq, which also suffered from the relative weakness of biotechnology. The iShares Nasdaq Biotechnology ETF (IBB 254.80, -6.70) tumbled 2.6%. Biotech also weighed on the health care sector (-1.4%), which was the only laggard among countercyclical groups.
The remaining defensive sectors—consumer staples (-0.6%), telecom services (-0.4%), and utilities (+0.9%)—outperformed with utilities overtaking the health care sector for the top spot on this year's leaderboard. The rate-sensitive sector extended its year-to-date gain to 6.2% versus 5.6% for health care.
Despite the daylong selling pressure, participation was below average with 678 million shares changing hands at the NYSE floor.
Reviewing today's data:
* Retail sales increased 0.3% in February after declining a downwardly revised 0.6% (from -0.4%) in January. The consensus expected retail sales to increase 0.2%.The report was pretty solid, but did not represent an upward shock that would come as a result of pent up winter-delayed demand. Sales increased in-line with the 0.2% increase in aggregate earnings that were reported in the February employment report. We would have expected a bigger upward swing if pent up demand was unleashed.
* The initial claims level fell to 315,000 for the week ending March 8 from an upwardly revised 324,000 (from 323,000) for the week ending March 1. The consensus expected the initial claims level to increase to 329,000. The DOL reported that there were no special factors that drove the initial claims level to its lowest point since November 2013.
* Total business inventories increased 0.4% in January after increasing an unrevised 0.5% in December while the consensus expected an increase of 0.3%. Total inventories consist of manufacturers, merchant wholesalers, and retailers. Both manufacturer (0.2%) and wholesaler (0.6%) inventories were announced prior to the release. The only unknown was retailer inventories, which increased 0.4% in January after increasing 0.7% in December. The important takeaway from the report was that the inventory gain may not have been planned. Total business sales fell 0.9% in January after declining 0.1% in December. That sharp drop in spending caused an overstock situation as more goods than expected were left on shelves.
* The Treasury Budget for February showed a deficit of $193.50 billion, which followed the prior month's deficit of $203.50 billion. The consensus expected the deficit to hit $195.00 billion.
Tomorrow, February PPI will be released at 8:30 ET while the preliminary reading of the Michigan Sentiment Survey for March will cross the wires at 9:55 ET.
* Nasdaq Composite +2.0% YTD * Russell 2000 +1.5% YTD * S&P 500 -0.1% YTD * Dow Jones Industrial Average -2.8% YTD