Falling Crude Prices a Drag Stocks and Inflation

Falling oil prices were a drag on U.S. stock indexes for a second day on Wednesday. Oil stocks dropped 1.6 percent helping to push the S&P 500 Index and the Dow Jones Industrial Average marginally lower. Both indexes face exposure to the energy sector while the technology-based NASDAQ Composite does not.

In the cash market, the benchmark S&P 500 Index closed at 2435.61, down 1.42 or -0.06%. The blue chip Dow Jones Industrial Average settled at 21410.03, down 57.11 or -0.27%. The tech-driven NASDAQ Composite finished at 6235.52, up 47.49 or +0.76%.

Economic News

In economic news, mortgage applications rose 0.6 percent as buyers continued to take advantage of the low interest rate environment. Existing home sales came out unexpectedly higher in May to the third highest monthly level in a decade. According to government figures, it rose 1.1 percent to a seasonally adjusted rate of 5.62 million units.

U.S. Treasury Yields

U.S. Treasury prices were mostly lower on Wednesday as investors reacted to the housing data and another plunge in oil prices.

The yield on the benchmark 10-year Treasury note was 2.153 percent, while the yield on the 30-year Treasury bond was slightly lower at 2.72 percent.

The drop in crude oil prices weighs heavily on inflation. If oil prices continue to fall then expect inflation to remain below the Fed’s 2.0 percent target. This would raise doubts about the central bank’s ability to raise interest rates later in the year.

Crude Oil

Oil prices continued to retreat on Wednesday after Tuesday’s sharp break. Traders were expressing concerns over the strength of compliance by OPEC and non-OPEC countries when it comes to slashing production.

Additionally, the U.S. Energy Information Administration said crude inventories declined by 2.7 million barrels during the week-ended June 16. This was greater than the 2.1 million barrel drop estimate.

Gold

Gold prices rose on Wednesday in reaction to the easing dollar and weakness in U.S. Treasury yields. The flattening of the U.S. Treasury yield to almost 10-year lows on Wednesday made the U.S. Dollar a less-desirable asset.

Gold prices were also supported by the notion that lower crude oil prices will be a drag on inflation. This is raising doubts as to whether the economy is strong enough to handle another rate hike by the Fed before the end of the year.

In other news, holdings in SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose 0.04 percent to 853.89 tonnes on Wednesday.