For the mid-week ending February 24, 2016, the Dow and S&P 500 are up as crude oil prices recover. After a big drawdown early Wednesday, crude oil prices recovered and the markets ended on a positive note. In other news: China’s stocks plunge on market liquidity worries; European stocks are on track to break a two-day run of losses; and, the U.S. services sector unexpectedly contracts.
A late day rally on Wednesday ends the mid-week higher as oil recovers. Sharp stock losses early Wednesday, as crude oil prices sagged, were reversed to end modestly higher as crude oil prices rebounded. The Dow ended 0.3 percent (53 points) higher after a 250-point drop; the S&P 500 ended 0.4 percent (8.5 points) higher after a 30-point drop. Oil futures (CLJ6) ended up 0.9 percent after a volatile day due to crude oil supplies showed a weekly rise of 3.5 million barrels which was offset by a decline in crude oil production.
China’s stocks plunged -6.4 percent on worries of market liquidity. The Shanghai composite index tumbled, ending the day with its worst percentage drop since January 26 of this year. This has occurred just as the world’s leading central bankers and finance ministers (G-20) are meeting in Shanghai. This sudden drop came as a surprise after liquidity injections by China’s central bank (PBOC) over the last few weeks helped stabilize the economy. Analysts attribute the drop due to many factors, from worries about tighter liquidity in the Chinese market to large withdrawals by investors who have been hammered by months of volatile trading in China. A total of 960 billion yuan in reverse purchase agreements (short-term loans made by the PBOC to commercial banks) are maturing this week which is creating a liquidity squeeze. Last week the PBOC withdrew 455.5 billion yuan of short-term loans, the largest weekly net withdrawal in over three years. The Shanghai composite index is already down -23 percent this year alone, making it the worst performing stock index worldwide.
Stocks in Europe are on track to break two days of losses. Thursday morning finds bank and commodity shares rising which should lead to healthy gains by the close. Most oil and gas shares are posting gains despite a slight decline in crude oil prices, now hovering slightly above $32 per barrel (WTI). The DAX is up 1.33 percent; the CAC is up 2.19 percent; the FTSE MIB is up 2.54 percent.
The U.S. services sector unexpectedly contracted in February. Financial data from Markit showed in its flash PMI that the services sector fell to 49.8 (from 53.2 in the prior month), short of the expected reading of 53.5. Any reading below 50 indicates contraction in economic activity. Bad weather is to blame for the unexpected decline in the index. A firmer housing market should help the economy to weather the storm in manufacturing. Fourth-quarter GDP grew at 0.7 percent; GDP for the first quarter of this year is expected to be above 2 percent.
If you’re trading options, it is suggested trading Put credit spreads for the remainder of the week at 2.5 standard deviations or greater. Expect the price of the SPX to fall within 1871 and 1990 (2 standard deviations) by this Friday.
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