American equities suffered their worst fall in three weeks on Tuesday in the wake of an unexpected decline in durable-goods orders and weak quarterly reports from Microsoft Corp. and Caterpillar Inc. The weak data ignited fears that economic growth is slowing down.
The selloff was led by weakness in economic data and company earnings, said Jonathan Golub, chief market strategist at RBC Capital Markets.
“Markets are down nicely, but in larger contexts, they are off only 3-4% from their peaks. This does not alter our general view that markets will gain in 2015. U.S. stocks will benefit from capital flows from foreign investors, due to stronger dollar and relative strength of our economy,” Golub said.
He said that there is nothing to worry about Tuesday’s surprised fall in orders for durable goods because they support his projection that the economy will grow 2.5% versus the mean forecast of 3%.
“We believe the 2.5% growth is the new benchmark,” he added.
Caterpillar, the largest construction machinery manufacturer worldwide, posted earnings that fell short of estimates, while Microsoft’s software-license sales to businesses missed Wall Street expectations. The oil selloff is the latest headwind for Caterpillar while a stronger U.S. dollar curbed sales of Microsoft.
“Currency headwinds, as well as evidence of a continual deceleration of global growth, is having a major impact on quarterly results,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said by phone. “Coupled with that, durable-goods orders were somewhat disappointing, which scotches any optimism for (yesterday’s) trading session.”
“Everybody is aware of weakness in crude oil, but you’re seeing spillover into large, industrial companies like Caterpillar and that may be giving people pause,” Peter Jankovskis, who helps oversee $1.9 billion as co-chief investment officer of Lisle, Illinois-based OakBrook Investments LLC., said in a phone interview. “And certainly Microsoft is a bellwether of the tech industry, and that’s another cause that’s having people pulling back.”
The world’s largest multinational consumer goods company, Procter & Gamble Co., said second-quarter profit fell 31 percent as the stronger dollar cuts into its profit.
United Technologies Corp. advanced 1.3 percent as a surging U.S. dollar ate away at sales and earnings from its international units, forcing the company to lower its annual forecast.
Among others, Pfizer Inc., DuPont Co. and Bristol-Myers Squibb Co. all are getting hurt by the greenback’s strength.
The Commerce Department reported orders for U.S. durable goods fell 3.4% in December after falling 2.1% in November. However, economists were looking for a modest rise. Analysts said it becomes harder for the Federal Reserve to complete the task of raising rates this year after the report.
CMC Markets chief market analyst Colin Cieszynski said the plunge in commodities prices clearly puts negative effect on economic data, but the benefits are not visible.
“The slowdown pushes the Fed’s rate-hike schedule a bit further into the fall or even toward the end of the year. We expect to see some more layoffs due to cuts in capex in the energy sector. It will take some time before consumers realize that low gas prices are here to stay and open up their purses,” Cieszynski said.
Separately, home prices in 20 U.S. cities edged back 0.2% in November but rose 4.7 percent compared with last year, according to the S&P/Case-Shiller 20-city composite index released Tuesday. The index grew at a slower pace, providing a sign the industry is not doing well even amid low mortgage rates.
And in another report, U.S. consumers showed a big rise in confidence about the overall economic condition at the start of 2015. The Conference Board Consumer Confidence Index jumped to 102.9 in January to the highest level since August 2007. Economists had expected a more modest reading of 95.1.
The dollar retreated from an 11-year peak versus major counterparts after weak pending data and worse-than-expected earnings riased concerns about the U.S. economy. Investors took profits off the table after seeing rally in the U.S. currency ahead of the year’s first meeting of the policy-making committee of the United States Federal Reserve which started Tuesday and end Wednesday with a statement of any policy changes.
“I would say the dollar selling we’ve seen so far is just position adjustments ahead of the major (Fed) event,” said Bart Wakabayashi, head of forex at State Street Bank.
“But I am a bit nervous that the dollar may have a further leg to go down if the Fed says something negative (about the U.S. economy), given that the market is still very long in the dollar on the whole,” he added.
The dollar index recorded its worst decline since early October on Tuesday to 94.10, increasing its distance from the 11-year high of 95.481 hit on Friday.
The euro rose to $1.1423 on Tuesday, continuing to move away from an 11-year low of $1.1098 hit on Monday.
The dollar has been making big gains since the second half of last year amid hopes the Fed will start raising rates this year as a result of a solid U.S. economic recovery.
But the currency’s strong rally, nearly 18 percent in the dollar index since June, have increased worries about profits at U.S. firms.
The yen moved higher along with bullion as crude oil made gains. Japan’s currency added 0.5 percent putting downward pressure on the Bloomberg Dollar Spot Index which saw its first decline in eight days.
Gold futures added 1 percent as 10-year Treasury yields dropped one basis point to 1.82 percent. It was the best rally in a week as investors also shifted their focus on the outlook for U.S. interest rates before the Federal Reserve ends a two-day meeting on Wednesday amid signs a sluggish economic growth across other parts of the world may be hurting U.S. growth.
Gold prices gained 9 percent in 2015 amid speculation the Fed will delay increasing borrowing costs amid mixed data.
“Mixed U.S. data is raising concerns that weaker foreign economies are weighing on U.S. growth and may prompt the Federal Reserve to delay interest rate increases,” Australia & New Zealand Banking Group Ltd. said in an e-mailed note.
Oil ended its three-day losing streak as the dollar weakened and OPEC provided signs that prices may go up without new investment in production.
Copper futures for March delivery declined but was up from the lowest price since 2009 of $2.419 marked on Monday.
U.S. natural gas futures climbed to $2.981 per million British thermal units as a snowstorm is keeping people living in the country’s northeast at home.