The Dow posted a record close for the second consecutive session on Wednesday after the Federal Reserve raised the key interest rate and provided details about how it intends to unwind its balance sheet. However, the Nasdaq and the S&P 500 ended in negative territory, weighed down by decline in technology and energy shares. Meanwhile, investors also digested weaker retail sales and inflation data for May.
For a look at the issues currently facing the markets, make sure to read today’s Ahead of Wall Street article.
The Dow Jones Industrial Average (DJI) advanced 0.2% to a record close at 21,374.56, retreating from an intraday high of 21,391.97. The S&P 500 declined 0.1% to close at 2,437.92. The tech-laden Nasdaq Composite Index fell 0.4% to finish at 6,194.89. A total of around 7.1 billion shares were traded on Wednesday, higher than the last 20-session average of 6.8 billion shares. The fear-gauge CBOE Volatility Index (VIX) traded near 10.6. Decliners outnumbered advancing stocks on the NYSE by a 1.13 to 1 ratio.
Fed’s Hike Rates
Financials moved north as Fed raised key interest rate on Wednesday at its recently concluded policy meeting. The Fed hiked key interest rate by 25 basis points, as was widely anticipated. The central bank announced the second rate hike of 2017 amid expectations that inflation is still short of central bank's target. The benchmark federal funds rate has been hiked to 1.00–1.25%, from the 0.75–1.0% set in Mar 2017. Fed policymakers reiterated their projections of one more rate increase in 2017, followed by three hikes each in 2018 and 2019.
Additionally, the central bank gave more detail on unwinding of its massive $4.5 trillion balance sheet that includes treasuries, mortgage-backed securities and government agency debt. So far, the central bank has been reinvesting the proceeds it receives from maturing securities in more bonds. The central bank called for gradual reduction in the amount of bonds it would be purchasing each month.
Coming to the details, the Fed aims to reduce fixed amount of assets on a monthly basis. Initially, the amount is expected to be $10 billion, including $6 billion from Treasuries and $4 billion from mortgage-backed securities (MBS). In addition, the capped amount will increase once in three months by $6 billion for Treasuries and $4 billion for MBS to achieve the target of $30 billion and $20 billion, respectively. (Read More)
Technology Shares Slip
Technology shares suffered another setback on Wednesday, taking down the broader markets with them. A report by Goldman Sachs Group, Inc. GS which issued warnings on valuations of major technology companies put investors in a cautious mood.
As per the report, tech stocks are less volatile, warning investors that they shouldn’t expect the tech stocks to continue to rally for long run. However, as per analysts recent gains in this sector have been deemed excessive, which is what is leading to a near term correction. The broader Technology Select Sector SPDR (XLK) fell 0.5%. Some of its key holdings including Apple Inc. AAPL and Microsoft Corp MSFT decreased 1% and 0.5% respectively.
Energy Shares Drop
Oil prices fell to their lowest level in seven months on Wednesday following the release of a report from the Energy Information Administration (EIA). EIA reported that domestic crude supplies declined by 1.7 million barrels for the week ended June 9, a smaller than what was anticipated. Additionally, as per the EIA gasoline stockpiles increased 2.1 million barrels, while distillate stockpiles rose by 300,000 barrels last week. Meanwhile, International Energy Agency (IEA) data estimated a surge in non-OPEC output next year, despite OPEC’s efforts to contain crude production.
WTI crude prices declined by $1.73, or 3.9%, to $44.73 a barrel. The broader Energy Select Sector SPDR (XLE) fell 1.8%, emerging as the worst performing sector of S&P 500. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Weak Economic Data
Retail sales declined in May, posting their biggest decline in sixteen months. The decline is attributable to low gasoline prices and falling auto sales. Moreover, sales at gasoline retailers declined 2.4%, marking the biggest fall in more than a year. Additionally, auto sales declined 0.2% last month.
Additionally, the consumer price index declined in May for the second time in three months. As per the U.S. Bureau of Labor Statistics, the Consumer Price Index fell by a seasonally adjusted 0.1% last month. The rate of inflation over the last year has slowed down to 1.9% last month compared to a five-year high of 2.7% four months ago.
Stocks that made Headlines
Caterpillar Hikes Dividend After a Gap of 2 Years
Caterpillar Inc. CAT announced that its board of directors have approved a 1.3% increase in quarterly dividend to 78 cents per share after a hiatus of two years. (Read More)
Equinix to Offer Alibaba Cloud Services via IBX Data Centers
Equinix Inc. EQIX recently got a contract from the cloud computing arm of Alibaba Group BABA, Alibaba Cloud, wherein it will offer the latter’s cloud services via its International Business Exchange (IBX) data centers. (Read More)
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