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Oil Slide Pressures Stocks but Weekly Gain Intact

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September 11, 2015

Stocks point lower in early action but a weekly gain for the major averages is still salvageable and adds to the tension facing interest rate decision-makers. The broader stock market may well track oil’s slippery path following a cut in Goldman Sachs’ crude price forecast (more below).

As of Thursday’s close, the S&P 500 (SPX) is up 1.6% for the holiday-shortened week (figure 1), but still down 5.2% for the year. China’s Shanghai Composite ended the week up 1.3%, while European equities are on track for a weekly gain, too. U.S. markets have established a pattern of “risk-averse” Fridays, heading into weekends that could deliver surprise headlines. Will this Friday follow course especially as participants look ahead to Fed week?

Uncertainty for the outcome of next Thursday’s Federal Reserve meeting conclusion has clouded stock trading. A former aide to chair Janet Yellen is in the news, saying the panel should pass for now on its first rate hike since 2006. There was little sign of Fed-pushing inflation in a producer price index report out this morning.

FIGURE 1: WEEKLY GAIN IN SIGHT?

The S&P 500 (SPX) managed a 0.5% gain Thursday and has continued to churn north of 1900 over recent sessions. It’s on track for weekly gains. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Oil Cuts Coming. Oil traded nearly 2% lower early Friday, apparently moving on news Saudi Arabia won’t back an emergency OPEC production meeting. But bigger-picture oil news is also flowing. In its closely watched monthly oil report, the International Energy Agency said the latest oil-price tumble is expected to cut non-OPEC supply by nearly a half million barrels a day as producers in the U.S., the U.K. and Russia cut spending. By the end of 2016, those cuts are likely to result in the biggest production decline since the fall of the Soviet Union, the IEA said. U.S. supply, generally produced from shale formations, is seen sinking by nearly 400,000 barrels a day next year, the IEA said. The demand picture is improving. The IEA said global oil demand growth is expected to climb to a five-year high of 1.7 million barrels a day in 2015, and will rise by 1.4 million barrels a day in 2016.

Goldman Rethinks. Goldman Sachs reworked their prediction. The global supply glut in the oil market is even bigger than expected, they said, and could push prices to as low as $20 a barrel. That’s the lowest end of their expectations. Goldman’s base case pegs U.S.-traded oil at $38 over the next month, averaging near $45 a barrel next year, down from a previous estimate of $57.

A Loss for Pfizer. Pfizer (PFE) shares could be volatile after a U.K. judge ruled against the drug maker in a closely watched patent case for blockbuster seller Lyrica. The ruling was in favor of the generic-drug makers free to sell cheaper versions of the seizure and fibromyalgia treatment.

Good trading,
JJ
@TDAJJKinahan

NC
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