Stocks Careen Lower Amid Oil Price Plunge

Welcome to the energy roller coaster. The energy recovery remains on track, but don’t put away the Dramamine just yet. Crude oil prices this year continue to subject investors to dizzying ups and downs.

Such was the case today, as oil prices plunged after spiking higher yesterday. The falling energy sector, combined with new tariffs, roiled markets. The main indices fluctuated between gains and losses throughout the day, as investors assessed the latest salvos in the global trade spat.

The Dow Jones Industrial Average and the S&P 500 closed in the red, while the tech-heavy Nasdaq inched into the green.

China announced Wednesday that it would impose additional import tariffs of 25% on $16 billion worth of U.S. goods. The move comes after the White House’s decision to slap 25% tariffs on $16 billion worth of Chinese goods effective August 23. Tit-for-tat, indeed.

China’s new tariffs today tanked oil prices and energy equities, largely because the targeted U.S. goods include crude oil and diesel. China has become a key market for burgeoning U.S. energy exports.

West Texas Intermediate plunged 3.41% today to close at $66.81 per barrel. Brent North Sea crude fell 3.23% to close at $72.24/bbl.

Tariffs versus earnings…

The trade conflict is clouding an otherwise positive earnings season. Of the 428 companies in the S&P 500 that have released second-quarter earnings so far, 79% have posted results that exceed analyst expectations.

For the second quarter to date, the blended year-over-year earnings growth rate for S&P 500 firms is 24%. “Blended” combines actual results for companies that have reported and estimated results for companies that have yet to report.

However, analysts are starting to lower their earnings estimates for the third quarter, mostly due to the trade war. Tariffs are boosting input costs which in turn erodes bottom lines. Several large export-dependent manufacturers recently lowered earnings guidance for full-year 2018, citing tariffs as the main reason.

In related news today, China and Germany vowed to defend their business ties with Iran. The two countries asserted that President Trump’s re-imposition of sanctions against Iran yesterday violated international law.

The Trump administration on Tuesday unilaterally imposed sanctions on Iran, following Trump’s decision earlier this year to withdraw from the 2015 Iranian nuclear deal. Global corporations that conduct substantial business with Iran already are announcing job cutbacks because of the renewed sanctions.

The sanctions are expected to remove up to 1 million to 1.5 million barrels per day (BPD) of Iranian oil off the market. The world consumes about 100 million BPD.

The following chart shows the up-and-down effects of sanctions on Iranian oil production (compiled with data from the Central Bank of Iran):

Tightening global crude supply is a tailwind for oil prices, but as we saw today, the trade war adds considerable volatility.

It didn’t help investor moods that signs emerged of slowing economic growth. The Mortgage Bankers Association reported this morning that U.S. mortgage application activity decreased to its lowest level in 2-1/2 years last week, as loan requests to refinance an existing home fell to their weakest level since December 2000. Rising interest rates and a shortage of homes for sale are to blame.

Brexit gets silly…

Overseas risk refuses to ease. In recent days, Britain’s negotiations to leave the European Union have descended into almost comical disarray. The U.K. is scheduled to quit the trading bloc on March 29, 2019, but details are yet to be hammered out.

In the rancorous Brexit debate, British politicians are hurling insults like characters in a Monty Python sketch.

A major motivation for Brexit was to limit immigration. Tory MP and former British foreign secretary Boris Johnson, a fierce advocate of Brexit, faced growing pressure Wednesday to resign his seat in Parliament, after asserting that Muslim women who wear full-face veils “go around looking like letter boxes.”

Johnson also has referred to Labour leader Jeremy Corbyn as a “mutton-headed old mugwump.” (Ya gotta love the Brits.)

British business leaders today implored the EU and the Conservative Party government of Prime Minister Theresa May to either reach a Brexit agreement soon or extend the deadline. If the deadline arrives with no deal in place, it would present an economic and political calamity for Europe.

Particularly vulnerable to Brexit is the financial hub of London, which has served as a growth engine for Britain. Brexit would re-impose costly regulations and impede the free flow of capital in London’s banking sector.

Many banks are pulling operations out of London. HSBC (NYSE: HSBC) announced Monday that seven of its major offices will move from London to Paris early next year. The banking giant cited Brexit as the reason.

Stocks struggled for traction today. That wall of worry is getting harder to climb.

Wednesday Market Wrap

  • DJIA: 25,583.75 -45.16 (0.18%)
  • S&P 500: 2,857.70 -0.75 (0.03%)
  • Nasdaq: 7,888.33 +4.66 (0.06%)

Wednesday’s Big Gainers

  • 3D Systems (NYSE: DDD) +32.35%

3D printing systems maker beats on earnings.

  • Vitamin Shoppe (NYSE: VSI) +32.10%

Nutritional supplement retailer beats on earnings.

  • Workiva (NYSE: WK) +16.67%

Cloud solutions provider tops revenue estimates.

Wednesday’s Big Decliners

  • Extreme Networks (NSDQ: EXTR) -32.03%

Network infrastructure developer falls short on revenue.

  • DepoMed (NSDQ: DEPO) -16.77%

Biotech posts a net loss.

  • Clean Energy Fuels (NSDQ: CLNE) -10.55%

Natural gas supplier disappoints on revenue and earnings.

Letters to the Editor

“Why did U.S. steel makers decline and China’s rise?” — Seth M.

U.S. steel production declined in recent decades mostly because of high labor costs. China took up the slack and became a dominant low-cost producer. At the same time, China has been a major consumer of its own steel, thanks to its construction boom. China also imposes tough restrictions on foreign steel entering its country, a source of contention between China and the U.S.

Questions about the trade war? Send me an email:

John Persinos is managing editor of Investing Daily.