U.S. stocks are struggling to make their stand in the New Year and they took a beating on Monday, leaving the S&P 500 index and the Dow Jones with their biggest losses since October 2014. In response to falling oil prices and a strong U.S. dollar (USD) a sell-off was triggered. As a result, the Dow Jones Industrial Average (DJIA) dropped 1.9% or 331.31 points to 17,501.65. Twenty eight of the index’s thirty components were down and the worst performers of the session were Caterpillar Inc. (NYSE:CAT), which fell 4.85 points, or 5.28%, to trade at 87.03 at the close. Meanwhile, the worst performer on the S&P 500 index (SPX) was United Rentals Inc. (NYSE:URI) which traded at 92.25, down 10.95%. This index had its biggest one day decline in the last 3 months and has now experienced its longest losing streak of 4 days in the last year. The benchmark index lost 1.8%, or 37.62 points, to 2,020.58. Following the downward trend was the Nasdaq Composite index (COMP) which fell to 4,652.52, down 1.6% or 74.24 points. On the NYSE (New York Stock Exchange), declining stocks outnumbered advancing ones by 2351 to 456.
In response to a narrower deficit than expected in Australia’s trade data, the Australian dollar (AUD) gained on Tuesday. As a result, the AUD/USD currency pair traded up 0.34% at 0.8112. According to the trade data released on Tuesday, the country’s November trade balance came in at a deficit of A$925 million. This was better than the expected deficit of A$1.59 billion. Today, at 0145GMT or 0945 Beijing time, the HSBC's China December services Purchasing Managers Index (PMI) is due. The survey reflected a reading of 48.8 in November. In other currency news, the EUR/USD currency pair hit its weakest level since February 2006. The pair traded at 1.1858 and then moved up 0.03% to trade at 1.1938 in Asian trading on Tuesday. The euro has been under pressure lately after Mario Draghi, the President of the European Central Bank (ECB), stated on Friday that there is now far greater risk than 6 months ago if the bank does not make the necessary changes in order to ensure price stability. The uncertainty of Greece’s future in the Eurozone also weighs on the euro with elections coming up later in the month. Added to this, was data which showed that the inflation in Germany had slowed to its lowest level in December since 2009. That is, data showed that consumer price inflation in Germany accelerated at an annualized rate of 0.2% last month. This was below forecasts for 0.3% while there was a clear slowdown from the 0.6% in November.
With the falling oil prices, it was only a matter of time before related stock prices started to take a beating. The next victim on the list is Caterpillar Inc. (CAT, -5.28%) whose shares took a tumble on Monday in response to the rapidly declining oil prices. On Monday, J.P. Morgan downgraded the stocks of Caterpillar from neutral to underweight. The downgrade came in response to concerns regarding the company’s direct exposure to gas and oil as well as their indirect exposure to emerging markets, construction in the U.S. and mining. As a result, the stock price of Caterpillar fell almost 6 percent during trading on Monday.
Caterpillar is well known in the industry as the maker of bulldozers and diggers. The company also supplies on-site drilling with transmissions and reciprocating engines as well as turbines to offshore rigs. Caterpillar also provides equipment for construction which is then used in the development of infrastructure, among many other services. Based on this and according to analysts, the company’s direct exposure to the sector is valued at approximately 12% of revenue or over $6 billion whereas its indirect exposure could be as much as fifteen percent of revenues. On these calculations, this means that the total Caterpillar revenue is already facing pressure on almost 30% over the next two years.
Adding to the pressure of falling oil prices, over 5 percent of Caterpillar’s total revenue is linked to gas and oil states while approximately 17 percent of their revenue is tied to the construction markets in North America. With exposure also to Canadian Oil Sands and a decline in demand, Caterpillar is expected to take a knock. On Monday, crude oil prices plummeted below $50 a barrel while Caterpillar is currently trading at $87.03 per share.
With the U.S. dollar (USD) as a key focus, gold prices held steady to lower on Tuesday. Investors have taken to the sidelines with their main focus on the current political turmoil in Greece as well as concerns over the Eurozone. As a result, gold futures for February delivery on the Comex division of the NYME traded at $1,203.30 a troy ounce, down 0.06%. This came after the precious yellow metal reached an intraday high of $1,202.00. On Monday, gold futures edged higher with investors turning to the metal as a safe haven from declining oil prices as well as fears of an economic slowdown globally. In 2014, gold prices dropped by 2% and this came in response to economic recovery in the U.S. which will prompt the Federal Reserve to hike interest rates sooner than expected. Adding pressure to the gold price is expectations of higher borrowing rates making it much hard for this precious metal to compete with yield-bearing assets.