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Stocks Close Sharply Lower On Profit Taking, Fed Minutes - U.S. Commentary


Stocks moved sharply lower over the course of the trading day on Wednesday, as traders cashed in on some of the recent strength in the markets. A negative reaction to the minutes of the latest Federal Reserve meeting generated additional selling pressure.

The major averages saw further downside going into the close, ending the session just off their worst levels of the day. The Dow fell 108.13 points or 0.8 percent to 13,927.54, the Nasdaq tumbled 49.18 points or 1.5 percent to 3,164.41 and the S&P 500 slid 18.99 points or 1.2 percent to 1,511.95.

The substantial weakness on Wall Street was partly due to profit taking, with the pullback by the major averages coming after they ended the previous session at multi-year closing highs.

Analysts have frequently suggested that the markets are in store for a correction, although traders previously seemed reluctant to sell stocks and miss out on any further upside.

Stocks accelerated to the downside in afternoon trading after the Fed released the minutes of the latest meeting of the Federal Open Market Committee, the monetary policy-setting arm of the central bank.

While the minutes showed that most FOMC members agreed that it would be appropriate to continue the central bank's asset purchase program, several participants emphasized that the committee should be prepared to vary the pace of asset purchases

The Fed said a number of participants indicated that an ongoing evaluation of the efficacy, costs, and risks of the asset purchases might lead the committee to taper or end the program before there is a substantial improvement in the outlook for the labor market.

At the same time, other FOMC members warned about the potentially significant costs of reducing or ending asset purchases too soon.

"According to the minutes, the FOMC will be reviewing its asset purchases at the upcoming meeting in March," said Paul Ashworth, Chief U.S. Economist at Capital Economics. "In light of these minutes, it is possible that those purchases could be scaled back at that point."

Worries about the outlook for the housing market also weighed on stocks after a report from the Commerce Department showed a bigger than expected drop in housing starts.

The report said housing starts fell 8.5 percent to a seasonally adjusted annual rate of 890,000 in January from the revised December estimate of 973,000. Economists had expected housing starts to drop to 914,000 from the 954,000 originally reported for the previous month.

Meanwhile, the Commerce Department also said building permits, an indicator of future housing demand, rose 1.8 percent to an annual rate of 925,000 in January from the revised December rate of 909,000.

A separate report from the Labor Department showed a modest increase in producer prices in January, with an increase in food prices offsetting a drop in energy prices.

Sector News

While most of the major sectors showed notable moves to the downside on the day, housing stocks posted particularly steep losses on the heels of the housing starts report. Reflecting the weakness in the housing sector, the Philadelphia Housing Sector Index plummeted by 5.5 percent.

Toll Brothers (TOL) helped to lead the housing sector lower, with the luxury homebuilder falling by 9.1 percent after reporting weaker than expected fourth quarter results.

Substantial weakness was also visible among gold stocks, which moved lower along with the price of gold. With gold for April delivery sliding $26.20 to $1,578 an ounce, the NYSE Arca Gold Bugs Index plunged 5 percent to its worst closing level in well over three years.

Steel stocks also saw considerable weakness on the day, dragging the NYSE Arca Steel Index down by 4 percent to a two-month closing low. Oil service, computer hardware, chemical, and airline stocks also posted steep losses amid broad based selling pressure.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly higher during trading on Wednesday. Japan's Nikkei 225 Index advanced by 0.8 percent, while Hong Kong's Hang Seng Index rose by 0.7 percent.

Meanwhile, the major European markets turned in a mixed performance on the day. While the U.K.'s FTSE 100 Index rose by 0.3 percent, the German DAX Index fell by 0.3 percent and the French CAC 40 Index dropped by 0.7 percent.

In the bond market, treasuries saw considerable volatility following the release of the Fed minutes before closing roughly flat. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, edged down by less than a basis point to 2.021 percent.

Looking Ahead

Trading on Thursday could be impacted by reaction to quarterly results from Wal-Mart (WMT), with the retail giant scheduled to release its first quarter results before the start of trading.

Economic news may also attract some attention, with traders likely to keep an eye on reports on weekly jobless claims, consumer price inflation, and existing home sales.

by RTTNews Staff Writer

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