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Stocks Extend Sell-Off Amid Several Negative Catalysts - U.S. Commentary


Extending the sell-off seen in recent sessions, stocks moved sharply lower over the course of the trading session on Thursday after showing a lack of direction early in the day. With the steep drops, the major averages once again tumbled to their lowest levels in over a year.

The major averages ended the day firmly in the red but off their lows of the session. The Dow plummeted 464.06 points or 2 percent to 22,859.60, the Nasdaq tumbled 108.42 points or 1.6 percent to 6,528.41 and the S&P 500 slumped 39.54 points or 1.6 percent to 2,467.42.

The continued weakness on Wall Street reflected several negative catalysts, including the increased risk of a partial government shutdown.

President Donald Trump told House Republicans he is unwilling to sign a short-term spending bill approved by the Senate due to a lack of funding for his controversial border wall.

"The president informed us he will not sign the bill that came from the Senate last evening because of his legitimate concerns for border security," House Speaker Paul Ryan, R-Wis., said after a meeting with Trump.

The Senate bill passed by a voice vote Wednesday night would fund key government agencies through February 8th but pushes a debate over funding for the border wall into the next Congress.

Trump's apparent unwillingness to sign the Senate bill comes as lawmakers face a December 21st deadline to fund key government agencies such as the Department of Homeland Security, the State Department and the Interior Department.

Renewed concerns about U.S.-China trade talks also weighed on the markets after the Justice Department announced the criminal indictment of two computer hackers associated with the Chinese government.

The unsealed indictment charges the two Chinese nationals with conspiracy to commit computer intrusions, conspiracy to commit wire fraud, and aggravated identity theft.

The defendants, identified as Zhu Hua and Zhang Shilong, are accused of conducting global campaigns of computer intrusions targeting, among other data, intellectual property and confidential business and technological information at managed service providers.

Deputy Attorney General Rod Rosenstein said Zhu and Zhang allegedly committed their crimes in association with a Chinese intelligence service known as the Ministry of State Security.

Traders also continued to digest Wednesday's rate hike by the Federal Reserve as well as the less dovish than hoped accompanying statement.

Raising concerns among some investors, the Fed indicated it plans to continue to raising interest rates despite signs of slowing economic growth.

Disappointing economic data has added to concerns about the Fed's plans, with a Labor Department report showing initial jobless claims rebounded in the week ended December 15th.

The report said initial jobless claims rose to 214,000, an increase of 8,000 from the previous week's unrevised level of 206,000. Economists had expected jobless claims to climb to 216,000.

A separate report from the Philadelphia Federal Reserve said manufacturing activity in the Philadelphia region continued to grow but remained subdued in the month of December.

The report said the diffusion index for current general activity dropped to 9.4 in December after tumbling to 12.9 in November.

While a positive reading still indicates growth in regional manufacturing activity, economists had expected the index to rise to 15.0.

Meanwhile, the Conference Board released a report shortly after the start of trading showing an unexpected increase in leading U.S. economic indicators in the month of November.

The Conference Board said its leading economic index rose by 0.2 percent in November after falling by a revised 0.3 percent in October.

Economists had expected the index to come in unchanged compared to the 0.1 percent uptick originally reported for the previous month.

"The LEI increased slightly in November, but its overall pace of improvement has slowed in the last two months," said Ataman Ozyildirim, Director of Economic Research at the Conference Board.

He added, "Solid GDP growth at about 2.8 percent should continue in early 2019, but the LEI suggests the economy is likely to moderate further in the second half of 2019."

Sector News

Energy stocks showed a substantial move to the downside on the day amid a sharp pullback by the price of crude oil. After jumping $1.57 to $48.17 a barrel on Wednesday, crude for February delivery plunged $2.29 to a seventeen-month closing low of $45.88 a barrel.

Reflecting the weakness in the energy sector, the Philadelphia Oil Service Index plummeted by 4.9 percent, while the NYSE Arca Natural Gas Index and the NYSE Arca Oil Index tumbled by 2.8 percent and 2.5 percent, respectively.

Substantial weakness also emerged among retail stocks, as reflected by the 2.4 nosedive by the Dow Jones Retail Index. The index slumped to its lowest closing level in eight months.

Biotechnology, software, commercial real estate and chemical stocks also saw considerable weakness amid another broad-based sell-off on Wall Street.

Meanwhile, gold stocks were among the few groups to buck the downtrend, with the NYSE Arca Gold Bugs Index spiking by 5 percent after plunging by 5.8 percent in the previous session.

The rebound by gold stocks came as gold for February delivery surged up $11.50 to $1,267.90 an ounce after coming under pressure in electronic trading on Wednesday.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Thursday. Japan's Nikkei 225 Index plunged by 2.8 percent, while Hong Kong's Hang Seng Index dropped by 0.9 percent.

The major European markets also moved to the downside on the day. While the U.K.'s FTSE 100 Index slid by 0.8 percent, the German DAX Index and the French CAC 40 Index tumbled by 1.4 percent and 1.8 percent, respectively.

In the bond market, treasuries moved modestly lower over the course of the session after seeing recent strength. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, inched up by 1.1 basis points to 2.789 percent.

Looking Ahead

Trading on Friday may be impacted by key economic data, including a final reading on third quarter GDP as well as reports on durable goods orders, personal income and spending, and consumer sentiment.

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