S&P 500; US Indexes Fundamental Daily Forecast – Drop in Oil Weighs on U.S. Stock Indexes

The weakness in the crude oil market that helped drive U.S. equity prices on Tuesday spread to the Asian market on Wednesday, pushing stocks lower on most Asian bourses.

In other news, MSCI announced it would add China A-shares to its MSCI Emerging Markets Index after rejecting China’s previous three attempts. The index fund giant announced it will add 222 China A Large Cap stocks from next year.

A MSCI executive said that roughly $17 billion or more could now flow in Chinese stocks, but others weren’t too optimistic. One group of analysts said the inclusion in the MSCI will provide “only a modest boost” to capital market reforms in China, especially in the areas of shareholder rights and debt market reform, but is unlikely to be a breakthrough.

Another said, “Regardless of the MSCI decision, Chinese equity markets still suffer from serious institutional shortcomings as well as heavy political influence,” said Michael Hirson and Christopher Beddor from Eurasia Group.

The MSCI news failed to instill any optimism into the market with investors focusing on the drop in crude oil prices which drove down the energy sector. Crude fell to a seven-month low following news of an increase in production from Libya and Nigeria. Crude oil is now in a bear market, having fallen 20 percent from its high this year.

In other news, Saudi Arabia relieved Muhammad bin Nayef as crown prince, replacing him with Mohammad bin Salman. The markets had little reaction to this news.

Investors are also watching the comments from Fed speakers this week. Chicago Fed President Charles Evans told CNBC the central bank could wait until year-end before making a decision on increasing interest rates.

Boston Fed President Eric Rosengren sounded more hawkish, saying that low interest rates meant policy would be “less capable of offsetting negative stocks.”

Federal Reserve Vice Chairman Stanley Fischer warned that while the U.S. and other nations have taken actions to strengthen their housing finance systems, more needs to be done to prevent a future crisis.

Finally, Dallas Fed President Robert Kaplan expressed doubt that short-term interest rates are very accommodative and said he wants to wait for more data to understand whether recent weak inflation readings are transitory as he suspects.

Forecast

There are not a lot of negatives affecting stocks at this time, other than the weakness in crude oil. Longer-term investors still like the long side because of optimism over the economy, strong earnings and the low interest rate environment. Therefore, any short-term corrections are likely to be technical in nature due to overbought conditions.