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Stocks Pull Back Sharply Amid Steep Drop In Oil Prices - U.S. Commentary

Wallstreet 013013 28Jan15

After failing to sustain an initial upward move, stocks showed a substantial downturn over the course of the trading day on Wednesday. The losses on the day extended the sell-off seen in the previous session, with the Dow falling to its lowest closing level in over a month.

The major averages saw further downside going into the close, ending the session near their worst levels of the day. The Dow plunged 195.84 points or 1.1 percent to 17,191.37, the Nasdaq slumped 43.50 points or 0.9 percent to 4,637.99 and the S&P 500 tumbled 27.39 points or 1.4 percent to 2,002.16.

The sharp pullback by stocks was partly due to another steep drop by the price of crude oil, which fell to its lowest levels in almost six years.

Crude for March delivery plunged $1.78 on the day to $44.45 a barrel, hitting its lowest closing level since March of 2006.

The drop by the price of crude oil came as the Energy Information Administration said U.S. oil supplies rose by 8.9 million barrels in the week ended January 23rd, reaching their highest level in over 80 years.

Concerns about the impact of lower oil prices offset the positive sentiment generated by a batch of largely upbeat earnings news, although Apple (AAPL) still posted a strong gain on the day.

Shares of Apple jumped 5.7 percent after the tech giant reported first quarter earnings and revenues that were well ahead of expectations on strong iPhone sales.

Other well-known companies such as Electronic Arts (EA), Tupperware (TUP), and Boeing (BA) also reacted positively to their quarterly results.

Traders were also presented with the Federal Reserve's first monetary policy announcement of the New Year following the central bank's two-day meeting.

As was widely expected, the Fed left interest rates unchanged and reiterated its pledge to remain patient in beginning to normalize monetary policy.

The promise to remain patient came even though the Fed upgraded its assessment of the economy, saying that activity has been expanding at a solid pace since its December meeting.

While the Fed also said inflation is expected to decline further in the near term, the central bank still expects inflation to rise gradually toward its 2 percent target over the medium term.

Sector News

Reflecting the steep drop by the price of crude oil, energy stocks saw substantial weakness throughout much of the trading session.

Oil service stocks posted particularly steep losses on the day, dragging the Philadelphia Oil Service Index down by 5.6 percent. With the loss, the index pulled back further toward the three-year closing low it set earlier this month.

Considerable weakness also emerged among gold stocks, as reflected by the 3.6 percent loss posted by the NYSE Arca Gold Bugs Index. The weakness in the sector came as gold for February delivery slid $5.80 to $1,285.90 an ounce.

Software stocks also came under significant selling pressure, extending the sharp drop seen in the previous session. The Dow Jones Software Index tumbled by 2.4 percent to its lowest closing level in over three months.

Biotechnology, financial, airline and chemical stocks also moved notably lower on the day, reflecting the broad based weakness that emerged on Wall Street.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in yet another mixed performance on Wednesday. Japan's Nikkei 225 Index and Hong Kong's Hang Seng Index both edged up by 0.2 percent, while China's Shanghai Composite Index tumbled by 1.4 percent.

The major European markets also ended the day mixed. While the French CAC 40 Index dipped by 0.3 percent, the U.K.'s FTSE 100 Index inched up by 0.2 percent and the German DAX Index advanced by 0.8 percent.

In the bond market, treasuries accelerated to the upside following the Fed's policy announcement. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled by 10.1 basis points to 1.724 percent.

Looking Ahead

On the earnings front, Facebook (FB) and Qualcomm (QCOM) are among the companies releasing their quarterly results after the close of today's trading.

Additionally, Ford (F), Hershey (HSY), Harley-Davidson (HOG) and JetBlue (JBLU) are among those due to release their results before the start of trading on Thursday.

Thursday's trading could also be impacted by the release of reports on weekly jobless claims and pending home sales.

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