U.S. stocks closed mostly lower on Wednesday on news that the European Central Bank revoked a waiver that allowed banks to use Greek government debt as collateral for loans. Only the Dow Jones Industrial Average managed to close higher by 0.04 percent.
Just before the news around 3:30 p.m., stocks had turned positive with the Dow jumping more than 100 points. The Dollar, Euro, and U.S. 10-year all spiked going into the close.
“News out of the Greece negotiation process is causing investors to take profits,” said Art Hogan, chief market strategist at Wunderlich Securities.
“The European Central Bank is telling the Greek banking system that it will no longer accept Greek bonds as collateral for any repurchase agreement the Greek banks want to conduct,” said Peter Boockvar, chief market analyst at The Lindsey Group, said in a note.
“This is because the ECB only accepts investment grade paper and up until today gave Greece a waiver to this clause. That waiver has now been taken away and Greek banks now have to go to the Greek Central Bank and tap their Emergency Liquidity Assistance facility for funding,” he said. “This news will like scare depositors and result in further bank runs. This all said, if Greece can come to an agreement with the troika, I’m sure the ECB will reinstate the waiver.”
Donald Luskin, chief investment officer at TrendMacro, played down the news.
“If you put both of today’s policy moves together (revoking the waiver and adding the Emergency Liquidity Assistance fund), what it means is that the Greek government—not the Eurosystem—will be on the hook for collateral. But there will still be a funding mechanism for the banks, in case there is a serious run on them,” he said. “That’s the important thing.”
U.S. stocks held up relatively well for much of the day despite pressure from significant declines in oil.
“I don’t think in this entire cycle (we’ve had a day) where oil’s been off and markets stayed (mostly) up,” Hogan said. “I think it’s a testament to better economic data, ISM figures and auto sales.”
Crude oil futures settled down nearly 9 percent below $49 a barrel, erasing almost all the big gains from the past two days.
“The market knows we need some stabilization in energy prices for the economy to grow,” said Nick Raich, CEO of The Earnings Scout.
Oil prices have fallen around 50 percent from a high of $114 a barrel last June on the back of an over-supply and lack of demand.
WTI Crude Oil (March ’15)
This week’s earlier rebound sparked hopes that prices had hit a bottom after a seven-month rout, but growth concerns in China have prompted renewed concern for global oil demand.
China’s services sector grew at the slowest pace in six months in January as growth in new business weakened, an HSBC services purchasing manager’s index (PMI) showed Wednesday, Reuters reported.
China’s central bank increased its economic stimulus measures even further Wednesday by cutting the reserve requirement ratio (RRR) amid growing concerns about the rate of expansion in the world’s second-largest economy. The 50-basis points reduction to 19.5 percent, effective Thursday, is the first such cut since May 2012. This will lower the amount of deposits that each lender is required to hold as reserves.
U.S. stock index futures were negative on Wednesday, as a tentative rebound in oil prices faded. Asian and European markets also traded lower as oil prices declined, putting the brakes on a rally that had seen prices rise over 19 percent over the last four sessions.
The earlier oil rally pushed U.S. stocks significantly higher for two consecutive sessions on Monday and Tuesday.
“(Wednesday) ought to be a fairly quiet, uneventful day unless oil prices go sharply lower or rebound,” said Randy Frederick, chief managing director of trading and derivatives at Charles Schwab. “Wouldn’t be surprising to see the market take a bit of a sideways breather today after the rally.”
The ISM non-manufacturing Index posted 56.7 for January, a slight increase from December as economic activity in the services sector grew for the 60th consecutive month.
Boockvar said in a note that the figure was good but internal components “were very mixed.”
Earlier, the Purchasing Managers Index for the service sector rose in January, although companies reported the weakest level of new business growth in more than five years, financial data firm Markit said.
The ADP Employment report, which is seen as a precursor to Friday’s important jobs report, showed January payrolls increased by 213,000, below estimates of 225,000.
“Bottom line, job gains slowed, due in part to the energy sector but at more than 200,000, the monthly job gains still remain good, not great,” Boockvar said.
“Friday’s payroll estimate for the private sector is 228,000 with an unchanged unemployment rate of 5.6 percent,” he said. “But, with monthly job gains continuing at plus-200,000, the unemployment rate could be at the Fed’s non-accelerating inflation rate of unemployment by the time they walk into their April meeting. If they aren’t raising rates by June, they’ll have some explaining to do, especially if commodity prices have stopped going down.”
Total mortgage application volume increased 1.3 percent on a seasonally adjusted basis last week from one week earlier, according to the Mortgage Bankers Association.
The Cleveland Federal Reserve’s President Loretta Mester, a non-voting member of the Fed, said on Wednesday that the U.S. economy is on course for a rate hike by June.
The Dow Jones Industrial Average closed up 6.62 points, or 0.04 percent, at 17,673.02, with Walt Disney closing up 7.63 percent to lead blue chip gains and Merck down 3.23 percent as the greatest laggard.
Disney jumped as much as 8 percent to a new high following a blowout earnings report after the bell Tuesday. The combined gains of Disney and Visa, which rose about 2 percent, added more than 80 points to the Dow Jones Industrial Average and pushed the index into positive territory in mid-morning trade.
“(Disney’s) $170 billion market cap can have a bigger influence than small caps,” said Marc Chaikin, CEO of Chaikin Analytics. “I think the market is going to run into some profit taking here. If crude continues to fall we will move back down.”
The S&P 500 closed down 8.52 points, or 0.42 percent, at 2,041.51, with consumer discretionary leading gains for four sectors and energy losing 1.61 percent as the greatest decliner.
The Nasdaq closed down 11.0 points, or 0.23 percent, at 4,716.70.
Apple shares briefly rose more than 1 percent to hit a record intra-day high of more than $120 a share on a split-adjusted basis.
In encouraging news for the stock after Apple’s strong earnings report last week, ABI Research reported on Wednesday that Android smartphone shipments fell for the first time in the fourth quarter of 2014 while Apple’s iOS gained 90 percent.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded just above 18.
Decliners were a step ahead of advancers on the New York Stock Exchange, with an exchange volume of 899.7 million and a composite volume of 4.1 billion in the close.
High-frequency trading accounts for about 47.5 percent of trade volume this year, down from a peak of 61 percent in 2009, according to TABB Group estimates.
The U.S. 10-year Treasury note yield fell to 1.76 percent. The U.S. dollar gained against major world currencies.
Crude oil settled down $4.60, or 8.7 percent, at $48.45 a barrel on the New York Mercantile Exchange. Gold futures settled up $3.00, or 0.24 percent, at $1,264.50 an ounce.
—Reuters contributed to this report.
On tap this week:
Earnings: 21st Century Fox, Allstate, CBRE Group, Everest Re, Keurig Green Mountain, Lincoln National, Prudential Financial, Under Armour, Weatherford International, Yum Brands
Earnings: AstraZeneca, BNP Paribas, Daimler, Philip Morris, Sanofi,Michael Kors, Sirius XM Radio, Sprint, TevaPharma, Activision Blizzard,CME Group, Expedia, GoPro, LinkedIn, McKesson, News Corp., Nuance Communications, Symantec, Twitter, Buffalo Wild Wings, Lionsgate,Pandora, Tempur Sealy, Yelp
5:00 a.m.: Fed’s Rosengren speaks
7:30 a.m.: Challenger Job-Cut report
8:30 a.m.: International trade
8:30 a.m.: Jobless claims
8:30 a.m.: Productivity & costs
10:30 a.m.: Natural gas inventories
3:00 p.m.: Treasury STRIPS
4:30 p.m.: Fed balance sheet/Money supply
8:30 a.m.: Nonfarm payrolls
12:45 p.m.: Fed’s Lockhart speaks
3:00 p.m.: Consumer Credit
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