Small caps flat on oil, Fed comments
After plunging out of the gate this morning on hawkish comments from the Fed, small-cap stocks remained flat, fluctuating shallowly in and out of the red as crude oil gave back ground mid-session.
At 1:45 p.m. ET, the Russell 2000 (NYSE:IWM) was down 1.03, or 0.14%, to 734.22, while the Dow gained 67.49, 0.55%, to 12,347.81.
After climbing sharply higher earlier in the session, crude oil gave back some ground after sources in the Saudi Oil Ministry told CNBC that Saudi Arabia's oil output increased by almost 500,000 barrels per day this quarter. A barrel of crude oil was off $1.51 to $132.74 midday.
However, as crude has remained at heightened levels, Federal Reserve Chairman Ben Bernanke, addressed the threat of inflation, stating that the risk of a substantial downturn in the economy has eased and that the torrid incline in oil prices “has added to the upside risks to inflation and inflation expectations.”
“The Fed's comments clearly are meant to address a shift in their focus that reflects the massive run-up in oil and food prices,” said Andy Busch, foreign exchange strategist for BMO Capital Markets.
Traders interpreted the Fed’s remarks to mean a possible increase in interest rates, boosting the dollar. The greenback jumped to a three-month high against the yen and gained against the euro to around $1.5457 midday.
“So far, the Fed looks like they have influenced U.S. short-term rate expectations the most and therefore have brought the U.S. dollar back,” Busch said. “[The] market expects the Fed to raise rates 125 basis points over two years versus 75 basis points for the ECB.”
Although the central bank’s focus has turned to resisting “an erosion of longer-term inflation expectations,” Doug Roberts, author of the book Follow the Fed to Investment Success and chief investment strategist for ChannelCapitalResearch.com, says he doesn’t think hawkish comments necessarily lead to hawkish actions.
“In essence he’s not specifically talking about raising interest rates, but rather resisting inflation, which is very different from raising rates,” Roberts said. “I think he’s trying to gain some cheap insurance so that inflationary expectations don’t start going through the roof … right now he’ll maintain a current liquid environment and as long as we have negative real interest rates you’ll have an economy that tends to benefit small-cap stocks.”
In economic news, the trade deficit swelled to a wider-than-anticipated $60.9 billion for the month of April, climbing to the highest level in 13 months. Economists were forecasting the trade imbalance to inflate to $59.5 billion from March’s $56.5 billion. Excluding petroleum, the non-petroleum trade deficit lay flat at $36.1 billion in April.
“… The gain in imports did not reflect an improvement in domestic demand. … It was more a reflection of the near-7%, on average, jump in crude oil prices,” Jennifer Lee, economist at BMO Capital Markets, wrote in a note today. “There was a lot of price action going on in these numbers, but we continue to see a steady improvement in real trade volumes, which will provide economic support.”
Busch says that trade provides few qualities as a leading indicator, as trade patterns change slowly due to a long lag between the time contracts are signed and when goods actually leave the port.
“This report is from April,” Busch said. “Trade data does show where we were with the economy when crude oil was $25 lower. The one part I like in this report is the section on imports of real capital goods which shows growth … capital goods imported can help U.S. companies operate more efficiently, generate more jobs and reduce risk of future inflation. Consumer imports don't.”
In broader industry groups, gold and silver, oil and gas and airlines were under pressure, while crops were higher.
In small-cap headlines, HireRight, Inc. (Nasdaq:HIRE) is up a whopping 44% mid-session after the provider of on-demand employment background and drug screening services said this morning that it will merge with US Investigations Services. ChemGenex Pharmaceuticals (Nasdaq:CXSP) is up some 34% midday after it said today that it will gain full commercial control of a drug formerly known as Ceflatonin from its European partner Stragen Pharma.
On the downside, shares of Wireless Ronin Technologies, Inc. (Nasdaq:RNIN) are down 12% mid-session after the digital signage provider said late Monday that its chief financial officer and executive vice president, John Witham, has stepped down.
