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posted on 18 December 2015 Weekly Wrap-Up 18 December 2015

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U.S. stocks suffer worst two-day loss since late-August, as oil weighs

U.S. stocks fell sharply for the second straight day as crude prices hit a fresh six-year low and the yen dragged down the dollar, after the Bank of Japan startled markets on Friday by approving limited easing measures at a key policy meeting.

On Friday, the Dow Jones Industrial Average lost 367.39 or 2.10% to 17,128.45, while theS&P 500 Composite index fell 36.37 or 1.78% to 2,005.52, each suffering its worst two-day loss since late-August. The NASDAQ Composite index also dropped by 79.47 or 1.59% to 4,923.08, closing near session-lows.

On the S&P 500, all 10 sectors closed in the red, as stocks in the Financials, Energy and Consumer Goods industries lagged. In total, eight of the 10 sectors ended the session down by more than 1.3%.

Stocks were also pulled lower by the expiration of four asset classes on Friday in a quarterly event known as a "quadruple witching" hour. The event occurs four times a year on the third Friday of March, June, September and December when index futures, stock index options, stock options and single stocks all expire on the same day. Quadruple witching hours also typically result in higher than normal volatility in the markets.

The CBOE VIX Index, a gauge for market volatility, soared 1.79 or 9.29% to 20.70. Volatility has been exceedingly high over the last three sessions, after the Federal Reserve halted a seven-year zero interest rate policy on Wednesday by completing its first rate hike in nearly a decade.

The top performer on the Dow was Caterpillar Inc (N:CAT), which gained 0.49 or 0.76% to 65.39. Investors capitalized on a strong buying opportunity in Caterpillar (N:CAT), whose shares are still down by more than 25% this year. The world largest manufacturer of construction equipment has seen its stock plunge in 2015, amid a romp in mining stocks. Caterpillar was one of only two Dow components to close in the green.

The worst performer was Bank of America Corporation (N:BAC), which fell 5.53 or 3.80% to 140.03, after reports surfaced that Delta Air Lines Inc (N:DAL) made a $7.7 million purchase of a used 777 jetliner on Friday. The acquisition of the relatively low-price model triggered concerns of dampened enthusiasm in the industry for Boeing (N:BA)'s wide-body jetliners.

The biggest gainer on the NASDAQ was VimpelCom (O:VIP), which added 0.25 or 8.31% to 3.26. Shares in the Russian telecom giant are still down by more than 35% over the last six months. The worst performer was Citrix Systems Inc (O:CTXS) which fell 2.95 or 3.80% to 74.71.

On the S&P 500, NRG Energy Inc (N:NRG) finished as the top performer after surging 0.85 or 8.93% to 10.37. Energy companies closed Friday's session with the three-highest gains on the index, as traders took advantage of bargain prices. Shares in Chesapeake Energy Corporation (N:CHK) and Southwestern Energy Company (N:SWN) also jumped by more than 7% on the day. All three companies still remain down by more than 60% this year. The worst performer was Williams Companies Inc (N:WMB), which plunged 2.16 or 9.11% to 21.54.

On the New York Stock Exchange, declining issues outnumbered advancing ones by a 2,008 to 1,079 margin.

Additional stock news from Reuters at


USD/JPY fell sharply off two-week highs after the Bank of Japan detailed plans for a new round of Exchange Trade Fund purchases to complement its existing easing program, defying market expectations for a quiet monetary policy meeting on Friday.

The currency pair traded in a broad range between 121.06 and 123.52 before settling at ¥121.16, down 1.40 or 1.14%. With the considerable losses, the yen halted a four-day losing streak against the dollar. In June, the dollar hit a 12 and a half year high versus the yen, amid strong indications of an impending divergence in monetary policies between the Federal Reserve and the BOJ. On Wednesday, the Fed abandoned its seven-year policy of holding interest rates at record near-zero levels, by approving its first interest rate hike in nearly a decade.

In a unanimous vote, the Federal Open Market Committee (FOMC) lifted the target range on its benchmark Federal Funds Rate by 25 basis points to a level between 0.25% and 0.50%.

As the Fed wound down its comprehensive asset-purchasing program last fall, Japan continued to aggressively ramp up a host of easing measures in order to stimulate its flagging economic growth. Last October, the BOJ provided a jolt to the Japanese economy by expanding its annual purchases of government bonds by 30 trillion yen to 80 trillion yen. Two days earlier, the Fed officially ended a five-year, $4.5 trillion bond-buying program intended to lift the economy out of The Great Recession.

The surprising decision from the BOJ on Friday came less than two weeks after upward revisions on the national economic outlook showed the Japanese economy expanded slightly in the third quarter. The revised projection to growth of 1.0% in third quarter GDP from initial estimates of a 0.8% decline expunged gloomy sentiments of a potential recession in the world's third largest economy.

The Bank of Japan said Friday that it will continue to monitor inflation developments as persistently sluggish prices remain well below its long-term targeted goal of 2%.

Japan's alternative measure of Core Inflation, which excludes food and energy prices, rebounded to 1.2% in October after two previous monthly declines. In September, core inflation in Japan fell on an annual basis for the first time since April, 2013.

The BOJ said in a statement:

"It is appropriate to encourage a smoother decline in interest rates across the entire yield curve taking into account developments in the JGB market and the situation in financial institutions' asset holdings. Moreover, as conversion of firms' and households' deflationary mindset has been progressing under Quantitative Easing and many firms have become proactive in making investment in physical and human capital, it is desirable that these developments will become further widespread. From this perspective, the Bank decided to adopt supplementary measures for Quantitative Easing."

Elsewhere, Fed data released on Friday showed that its Average or Effective Federal Funds Rate traded between 0.25 and 0.59% in Thursday's session, up from 0.08 to 0.55% a day earlier. It marked the highest top end level of the Fed's benchmark rate since November, 2011.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell by more than 0.50% on to an intraday low of 98.67 before settling at 98.73. The index eclipsed 100.00 at the start of December to reach a 12-month high.

CTFC Commitment of Traders

Speculators this week were were less bullish on the dollar in data taken before the Fed rate meeting. Gold and silver sentiment became less bullish bullish, while bullishness increased for oil.



Gold bounced on Friday off near six-year lows, erasing severe losses from a massive sell-off from the previous session as investors continued to digest the Federal Reserve's historic decision to lift interest rates from record-lows earlier in the week.

On the Comex division of the New York Mercantile Exchange, gold for February delivery traded in a broad range between $1,050.30 and $1,070.60 an ounce before settling at $1,065.00, up 15.40 or 1.47% on the session. A session earlier, gold futures slid by $25 an ounce in one of their worst sessions of the year, retreating back toward levels not seen since 2009.

During a choppy, volatile week of trading, gold fell by approximately 1%. The precious metal has now posted weekly declines in eight of the last nine weeks, dating back to mid-October. For the year as a whole, gold has tumbled more than 10%, down sharply from its yearly-high around $1,300 in early-January.

Gold likely gained support at $1,046.20, the low from December 3 and was met with resistance at $1,134.70, the high from Nov. 3.

Citing improved labor market conditions and expectations that long-term inflation would move toward its targeted goal of 2%, the Federal Open Market Committee (FOMC) raised short-term interest rates on Wednesday for the first time in nearly a decade. In a unanimous vote, the FOMC lifted the target range on its benchmark

Federal Funds Rate by 25 basis points to a level between 0.25% and 0.50%. The Fed Funds Rate is the rate offered by institutions on overnight, interbank loans at the Federal Reserve Bank of New York.

Commodity traders had nearly a month to price in a rate hike after the Fed began to telegraph the move in early-November following a robust U.S. national employment report.

The beginning of the Fed's first tightening cycle since The Great Recession has been largely viewed as bearish for gold, which struggles to compete with high-yield bearing assets in higher rate environments.

In order to manage the Fed Funds Rate effectively, the U.S. Central Bank is implementing a pair of levers to help maintain the rate near its target. The Fed's new cycle began on Thursday when the New York Fed initiated the Overnight Reverse Repurchase Program (RPP) on its Open Market Desk. The tool intends to bolster loan demand, as the Fed borrows cash overnight from institutions in exchange for U.S. treasuries at a rate of 0.25%.

At the same time, the Fed raised the target rate offered on excessive reserves held by banks at the New York Fed to 0.50% as part of its monetary policy decision. In effect, the payments on reverse repurchases or reverse repo's will serve as a floor for the program, while the interest on the excessive reserves is intended to act as a ceiling.

On Thursday, the Average or Effective Federal Funds Rate traded in between 0.25 and 0.59%, according to data from the Federal Reserve, up from 0.08 to 0.55% a day earlier. The Effective Fed Funds Rate is the rate which the FOMC targets to reach its objective. It marked the highest top end level of the Fed's benchmark rate since November, 2011. The rate on excessive bank reserves also averaged 0.37% in Thursday's session, up from 0.15% in the prior day of trading.

In total, $105 billion of overnight RPP trades were made at the New York Fed's desk on Thursday, according to Fed data. The desk anticipates that approximately $2 trillion of Treasury securities will be made available for overnight RPP operations in order for the Fed to satisfy its objective, the New York Fed said in a statement. A contingent of roughly 125 institutions consisting of Banks, Government Sponsored Entities (GSEs), Money-Market Funds and Investment Managers are listed as overnight RPP counterparties on the New York Fed's website.

Dollar-denominated commodities such as gold become more expensive for foreign purchasers when the dollar appreciates.

Silver for March delivery surged 0.422 or 3.08% to 14.125 an ounce.

Copper for March delivery soared 0.068 or 3.34% to 2.112 a pound.


U.S. crude futures extended losses from the prior two sessions on Friday to slump to fresh seven-year lows, as crashing oil prices showed little signs of stabilizing following a modest increase in domestic oil rigs last week.

Energy traders also reacted to news that the U.S. Congress approved a sweeping $1.1 trillion spending bill, which includes the repeal of a four-decade ban on crude exports. The ban had been in place since 1975, when Congress approved the Energy Policy and Conservation Act to boost domestic supply in response to a global oil crisis started that had persisted for two years.

On the New York Mercantile Exchange, WTI crude for January delivery traded between $34.29 and $35.56 a barrel before closing at $34.72, down 0.23 or 0.66% on the session. At Friday's session lows, the front month contract for U.S. crude fell slightly below Monday's intraday low of $34.53 when WTI crude slipped below $35 a barrel for the first time since 2008. U.S. crude futures are now approaching $32 a barrel, a level not seen in 12 years when the domestic oil market staged a slow, multi-year recovery from the effects of the September 11 terrorist attacks.

On the Intercontinental Exchange (ICE), brent crude for February delivery wavered between $36.42 and $37.72 a barrel before settling at $36.89, down 0.26 or 0.70% on the day. In Friday's morning session, North Brent Sea futures tested 11-year lows from mid-2004 when it traded at $36.20. With the losses, crude futures completed their third consecutive weekly loss.

Both the international and U.S. domestic benchmarks of crude are down by more than 17% since OPEC opted to leave its output quota unchanged two weeks ago at a closely-watched meeting in Vienna.

Oil services firm Baker Hughes (N:BHI) said in its weekly rig count on Friday that U.S. oil rigs rose by 17 to 541 last week for the week ending on December 11. A week earlier, the rig count fell by 21 to 524, its sharpest drop in two months. Any increase in the rig count provides a lagging indicator that U.S. crude production could be on the rise.

Separately, a bearish report from Genscape, Inc. provided few indications that U.S. crude inventory levels are close to abating from near-record highs. Genscape, a leading global provider of energy data to commodity markets, said Thursday that stockpiles last week at the Cushing Oil Hub in Oklahoma increased by 1.4 million barrels. Cushing is the main delivery point for Nymex crude oil.

A day earlier, the U.S. Energy Information Administration (EIA) said U.S. commercial crude inventories rose by 4.8 million barrels last week to 490.7 million barrels, its highest level in at least 80 years. Oil prices worldwide have plunged more than 50% since OPEC roiled global markets last November with its strategic decision to maintain its production ceiling at a level above 30 million barrels per day. The tactic triggered a prolonged battle between Saudi Arabia and high-priced U.S. shale producers for market share, flooding global markets with a glut of oversupply.

Many energy analysts have expressed little confidence that the current supply-demand imbalance can be corrected in the near-term. Last week, the influential Paris-based International Energy Agency (IEA) said in its December Oil Market report that it expects global demand to increase by 1.2 million bpd in 2016, down from previous estimates for demand growth of 1.8 million bpd.

Meanwhile, the U.S. Senate and House of Representatives each passed an emergency spending measure on Friday, which contains a provision that rescinds the 40-year old export ban. U.S. president Barack Obama has indicated that he will sign the bill into law. An elimination of the export ban will create an estimated 1 million American jobs, resulting in an additional $170 billion for the U.S. economy, House speaker Paul Ryan said earlier this week.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell by more than 0.30% on Friday morning to an intraday low of 98.72. The index eclipsed 100.00 at the start of December to reach a 12-month high.

Dollar-denominated commodities such as crude become more expensive for foreign purchasers when the dollar appreciates.

Natural Gas (Thursday Report)

Natural gas futures turned lower on Thursday, erasing gains of more than 2% after data showed U.S. natural gas supplies in storage fell less than expected last week.

Natural gas for delivery in January on the New York Mercantile Exchange shed 0.4 cents, or 0.2%, to trade at $1.786 per million British thermal units during U.S. morning hours. Prices were at around $1.832 prior to the release of the supply data.

The U.S. Energy Information Administration said in its weekly report that natural gas storage in the U.S. in the week ended December 11 fell by 34 billion cubic feet, below expectations for a decline of 40 billion.

That compared with a drawdown of 76 billion cubic feet in the prior week, 61 billion cubic feet in the same week last year, while the five-year average change for the week is a decline of 120 billion cubic feet.

Total U.S. natural gas storage stood at 3.846 trillion cubic feet, 14.1% higher than levels at this time a year ago and 8.4% above the five-year average for this time of year.

Last spring, supplies were 55% below the five-year average, indicating producers have more than made up for all of last winter's unusually strong demand.

Inventories of the gas are typically built up during the warm summer months and then drawn down in the winter as cold temperatures increase demand for the fuel.

On Wednesday, futures fell to $1.775, a level not seen since September 2001, before ending at $1.790, down 3.2 cents, or 1.76%. Prices of the fuel are down 43% so far this year as weak demand and healthy stockpiles weighed.

The East Coast is projected to see temperatures 15 to 20 degrees above normal this week and warm weather is also expected in the Midwest.

Bearish speculators are betting on the warm pre-winter weather to dampen demand for the heating fuel. The heating season from November through March is the peak demand period for U.S. gas consumption.

Natural gas prices typically rise ahead of the winter as colder weather sparks heating demand, yet an unusually mild start to winter due to the El Niño weather phenomenon has limited the amount of heating days.

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