Russell 2000 and Oil price selloffs continue

By :  ,  Financial Writer

Stocks moved lower at midday as comments from Federal Reserve members cooled hopes of interest rate cuts, and Factset highlighted a worsening corporate earnings outlook. The more cyclical Russell 2000 was off 1.1% today and is down almost 15% from its summer. Oil prices fell another 2.8%, bringing its post-summer decline to 20%. The dollar was unchanged despite lower bond yields.

Bottom line: Risk-off.


Nine days to a US government shutdown?

Funding for the US government runs out in nine days if Congress fails to pass a funding extension. We’re back where we were in late September when the Speaker of the House pushed through a stop-gap funding bill that would keep the government funded until November 17, but in the process, lost his job. Conservative Republicans wanted the House to review 12 separate annual government funding bills rather than one big omnibus bill lacking transparency. This didn’t happen; Kevin McCarthy lost his job, and picking a new House speaker took weeks.

With no progress to pass spending bills, a government shutdown is now possible. While traders don’t care about government closure, they care if the political circus causes another US credit downgrade. The risks for another credit downgrade may be low, but if it did happen, the implications are significant, including a reversal in the recent decline in bond yields.

Earnings downgrades in Q4, earnings mises punished in Q3

Factset, the market data company, reports that stock analysts lowered earnings per share (EPS) estimates for Q4 2023 by 3.9% during October, a larger-than-average decline. Revenues exceeded forecasts by 7.1% in Q3, with most companies beating estimates. Earnings surprises, the difference between mean forecasts and outturns, often cause significant price reactions.

Companies reporting positive earnings surprises for Q3 2023 saw an average price increase of 0.8% two days before and after the two days after the earnings release – a little less than usual. Companies reporting negative earnings surprises saw an average price decrease of 5.2% in this four-day window – a little more than usual.

As if to make the point, Warner Brothers Discovery fell more than 17% in morning trade, down 40% from its 2023 peak, as the company noted reported weaker ad markets. Network advertising revenue fell 13% in Q3 year-on-year, and this decline could continue into 2024.

Fed chair says to think outside the box

Fed Chair Jerome Powell urged the central bank’s forecasters to “think outside” the box when using traditional economic models to build their projections. “Economic models can do a reasonably good job of capturing the working of the economy over past decades,” Powell said. “Of course, even with state-of-the-art models and even in relatively calm times, the economy frequently surprises us.” He didn’t develop this idea or comment on the outlook for interest rates and the economy.

Will Xi meet Biden?

China’s President Xi Jinping will attend the Asia-Pacific Economic Conference next week in San Francisco, but a meeting with President Joe Biden has yet to be agreed. Xi is expected to attend a dinner with US business leaders, easing concerns about doing business in China, which has caused many to withdraw. Negotiations continue, but no meeting has been agreed.


Russell 2000 heads towards correction territory

  • The cyclical and small-cap Russell 2000 fell 1.1% in morning trade, down 15% from its peak and heading for correction territory, while the S&P 500 and Nasdaq were unchanged
  • Foreign equity markets were mixed, with the Dax up 0.5%, while the Nikkei 225 was off 0.3% and FTSE 100 was off 0.1%
  • The VIX, Wall Street’s fear index, fell to 14.6 (the year’s low was 13.0)

Bonds yields and the dollar unchanged

  • 2-year yields were unchanged at 4.91%, while 10-year yields fell six basis points to 4.51%
  • The dollar index was unchanged at 105.5
  • Versus the dollar, the Yen was off 0.4%, the Euro was up 0.1% and Sterling was unchanged

Oil slips further

  • Oil prices fell close to 4% after China’s exports dropped for a sixth straight month, underscoring the slowdown in global demand. WTI crude oil prices are down almost $20 per barrel over the past 40 days despite Middle East war risks
  • Spot gold prices fell 0.8% to 1,958 per ounce, while Silver rose 0.7% to $22.7 per ounce
  • The grain and oilseed markets were notably higher at midday
  • Live cattle futures were higher after initially making new lows. Lean hog futures turned lower, taking back some of their recent gains.

Analysis by Arlan Suderman, Chief Commodities Economist:

Market outlook by Paul Walton, Financial Writer:

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