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Market News The close: U.S. stocks drop sharply with Fed announcement

U.S. stocks fell on Wednesday after the Federal Reserve’s forecast of fewer interest-rate increases in 2019 fell short of investors’ hopes of a more dovish monetary policy.

The Fed’s Federal Open Market Committee said in a statement following a two-day policy meeting that risks to the economy were “roughly balanced,” but it would “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

Investors said Fed Chairman Jerome Powell’s remarks in a news conference following the committee’s statement that he did not see the central bank changing its policy of keeping its balance sheet run-off on “autopilot” raised concerns of tightening financial conditions placing further strain on financial markets.

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“Powell is steadfast in his commentary today that he doesn’t see any tightening that stems from the unwinding of the balance sheet,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey. “The market message is we are seeing tighter financial conditions and a weaker path for growth.”

The Dow Jones Industrial Average fell 351.98 points, or 1.49 per cent, to 23,323.66, the S&P 500 lost 35.48 points, or 1.39 per cent, to 2,510.68, and the Nasdaq Composite dropped 140.80 points, or 2.08 per cent, to 6,643.11

Benchmark 10-year yields fell as low as 2.75 per cent, the lowest since April 4. The yields have fallen from a seven-year high of 3.261 per cent on Oct. 9.

Two-year note yields , which are the most sensitive to interest rate increases, declined as low as 2.62 per cent, the lowest since Aug. 24.

In Toronto, the S&P/TSX composite index also erased early gains with the Fed announcement, closing unofficially down 152.83, or 1.06 per cent, to 152.83.

All 11 of the index's major sectors finished lower on the day.

Materials stocks lost 3.7 per cent. First Quantum Minerals Ltd. dropped 7.7 per cent, while Barrick Gold Corp. finished down 7.3 per cent.

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Utilities were down 1.2 per cent, led by a 2.7-per-cent dip in Superior Plus Corp. and 2.4-per-cent loss by Brookfield Infrastructure Partners LP.

Financial stocks also declined 1.2 per cent, while energy stocks closed down 0.1 per cent despite a jump in oil prices.

Leading the index were Tamarack Valley Energy Ltd., up 10.9 per cent, Baytex Energy Corp., up 8.5 per cent, and Crescent Point Energy Corp., up by 6.9 per cent.

Lagging shares were Home Capital Group Inc., down 15.0 per cent, Yamana Gold Inc., down 9.1 per cent, and First Majestic Silver Corp., lower by 8.1 per cent.

The Canadian dollar weakened to a 1-1/2-year low against the greenback on Wednesday, pressured by softer-than-expected domestic inflation data and further declines on Wall Street as the Federal Reserve again raised interest rates.

The Canadian dollar was trading 0.1 per cent lower at $1.3488 to the greenback, or 74.14 U.S. cents. The currency touched its weakest level since June 2017, at $1.3507.

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“There really isn’t a strong catalyst for reversal here, basically in a situation where equities continue to fall under pressure,” said Mazen Issa, senior FX strategist at TD Securities. “CAD retains a bit of sensitivity to the overall equity dynamic.”

U.S. stocks are on pace for their biggest December decline since 1931, the depths of the Great Depression.

The latest jolt on the growth front came from Japan, which said its export growth slowed to a crawl in November, an ominous signal for the trade-focused economy.

Logistics and delivery firm FedEx, considered a bellwether for the world economy, slashed 2019 forecasts, noting “ongoing deceleration” in global growth.

“It’s a confluence of several important factors: the market is adjusting its outlook on growth and there is a consensus we will see a slowdown. More importantly, the market is adjusting to the idea this will translate into lower earnings growth,” said Norman Villamin, chief investment officer for private banking at Union Bancaire Privee in Zurich.

“It’s being complicated by the tightening liquidity situation with the Fed expected to move today and the ECB having signaled the end of its (stimulus)”.

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Oil prices rose on Wednesday, recovering somewhat from a sharp selloff during the previous session, after U.S. data showed strong demand for refined products.

Sentiment remained negative, however, as investors grappled with weakening demand and worries about oversupply.

Brent crude futures rose 98 cents to settle at $57.24 a barrel, a 1.74-per-cent gain. The front-month U.S. light crude contract, which expires on Wednesday, gained 96 cents to settle at $47.20 a barrel, a 2.08-per-cent gain. The second-month contract settled at $48.17 a barrel.

Crude inventories fell by 497,000 barrels in the week to Dec. 14, smaller than the decrease of 2.4 million barrels analysts had expected. The decline was the third consecutive decrease, the U.S. Energy Information Administration said.

Distillate stockpiles, which include diesel and heating oil, fell by 4.2 million barrels, versus expectations of a 573,000-barrel increase, the EIA said. Distillate demand rose to the highest since January 2003, which bolstered buying, particularly in heating oil futures, the market’s proxy for diesel.

Heating oil futures gained nearly 3 percent to settle at $1.8054 a gallon.

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“Today’s price advance appears driven as much by profit-taking/short-covering rather than any noticeable shift in the oil balances,” Jim Ritterbusch, president of Ritterbusch and Associates, said in a note.

The markets slumped on Tuesday, extending recent declines. Global benchmark Brent tumbled to a session low of $55.89 a barrel, a bottom last reached in October 2017. WTI sank to $45.79, the weakest since August 2017.

Reuters

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