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Fed Chair’s Hawkish Tone on Rate-Hike Led SPY Lower

Renee Blakely

US Equities Slide on Crude Oil and Janet Yellen’s Hawkish Note

SPY ended with a -1.02% yield

The SPDR S&P 500 ETF (SPY) and the Direxion Daily S&P500 Bull 3X ETF (SPXL) fell 1.02% and 3.2%, respectively, on Wednesday, December 2. The Federal Reserve Chairperson, Janet Yellen, addressed the Economic Club of Washington and mentioned that US economic growth is strong and that the risks tied to global factors have eased out. Her tone was hawkish regarding the probability of a rate hike in the Fed’s December meeting. The likelihood of the rate hike rose after the ADP employment report for November 2015 displayed strength and stood out with employment figures that were better than expected.

According to the report, the ADP employment for government payrolls came in at 217,000 in November 2015, surpassing the forecast of 183,000.

Th report above, along with Friday’s employment report and the Beige Book prepared for the Federal Open Market Committee or FOMC meeting, depicts a healthy economy, making the case of the rate lift-off “compelling” and US equities less attractive. The graph above gives a market snapshot as of December 2, 2015.

In the graph, the US dollar is represented by the PowerShares DB US Dollar Bullish ETF (UUP), oil is represented by the United States Oil Fund (USO), and gold is represented by the SPDR Gold Trust (GLD). The Treasury bond market is represented by the iShares 20+ Year Treasury Bond (TLT) while volatility is represented by the Volatility S&P 500 Index.

Market overview

The US dollar gained strength on the day as the rate hike probability gained strength and the US economic indicator, employment report, came out strong. Government bond yields rose as the interest rate hike’s likelihood increased. Also, gold lost its appeal amid high-yield government bonds and the rising US dollar value against other currencies.

The supply glut in crude oil rattled oil prices and led to a sell-off in major sectors of the SPY exchange traded fund. The plunge in oil prices caused the stocks of QEP Resources (QEP), Denbury Resources (DNR), Kinder Morgan (KMI), and OneOk (OKE) to fall by 9.0%, 8.1%, 7.9%, and 7.6%, respectively, on December 2.

Next, let’s look into the fall in crude oil prices in detail.

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