U.S. Stocks Decline With Oil Prices

By Jon Sindreu 

U.S. stocks fell as energy shares declined with the price of oil and several large banks reported mixed earnings results.

The Dow Jones Industrial Average dropped 74 points, or 0.4%, to 19753 shortly after the opening bell. The S&P 500 declined 0.2% and the Nasdaq Composite slipped less than 0.1%.

Goldman Sachs slipped 1.3%, even after the U.S. investment bank reported stronger-than-expected profits. Shares had surged in the wake of the election, and some analysts had speculated ahead of the earnings report that strong results were already priced in. Citigroup dropped 1.6% as the bank's revenue missed forecasts.

Bank earnings will be key to determining whether the U.S. stock market is overvalued after the recent rally, analysts say. Financial shares have propelled a postelection rally in stocks that has carried indexes to new highs and the Dow Jones Industrial Average within reach of 20000.

The Stoxx Europe 600 dropped 0.2% after remaining mostly unchanged in early European trade. The biggest loser was the media sector, which was sandbagged by Pearson's 29% drop, after the London-based publisher warned of lower future dividends on the back of weaker profit expectations.

Despite Pearson's drag, the FTSE 100 gained 0.2%. Asian shares were mixed, with the Japanese Nikkei closing 0.4% higher.

Financial markets have struck a cautious tone ahead of Mr. Trump taking office Friday, with investors appearing to have some second thoughts about the risk-driven trades that have dominated since the U.S. election on Nov. 8. While Mr. Trump's rhetoric against free trade has long scared many analysts, markets initially focused on his plans to slash taxes and regulations and boost infrastructure spending.

Investors are now waiting for further clarity on such policies, as well as corporate earnings, to decide whether growth and inflation will come through, or whether markets got ahead of themselves after the election.

"A lot of the indicators we follow are now pointing at the market being overstretched," said Andrew Pease, global head of strategy at London-based Russell Investments. "The U.S. economy's fine, but markets have fully priced that in already."

The pound fell 0.9% against the U.S. dollar to $1.2285 after Tuesday's 3% surge, the biggest daily rise in eight years. Sterling was bolstered by U.K. Prime Minister Theresa May pledging to subject the final Brexit deal to a parliamentary vote.

Nevertheless, many analysts said Mrs. May's announcement that Britain is set to leave the European single market will end up weighing on sterling at the first sign of weak economic data.

"Enjoy the party, but make sure you dance close to the door," said Antje Praefcke, an analyst at German lender Commerzbank AG.

The WSJ Dollar Index, which tracks the currency against a basket of 16 others, rose 0.5%. On Tuesday, it hit a one-month low after Mr. Trump described the currency as "too strong" in an interview with The Wall Street Journal.

The dollar's gains came as Federal Reserve Bank of San Francisco President John Williams argued that gradual interest-rate increases would leave the economy unharmed.

Bond yields in the U.S. and Europe rose to reflect investors' belief that monetary policy is unlikely to become much looser. After falling to 2.327% on Tuesday, the lowest closing since late November, yields on 10-year Treasurys recovered to 2.375%, according to Tradeweb.

Haven assets, which had been propped up as investors became jittery ahead of Mr. Trump's inauguration, also changed direction. Gold was broadly flat Wednesday and the Japanese yen retreated against all major currencies.

Traders will closely monitor Wednesday evening's speech by Fed Chairwoman Janet Yellen to gauge whether interest rates are likely to rise at a faster or slower pace than they are currently expecting. Further signs of tighter-than-expected policy in the U.S. could depress Treasurys again, boosting the dollar.

"Markets have traveled on hope, now they are going to have to deal with the facts," said Neil Dwane, global strategist at Allianz Global Investors.

Write to Jon Sindreu at [e-mail]

(END) Dow Jones Newswires

January 18, 2017 09:58 ET (14:58 GMT)

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