Small caps sink on Bernanke inflation comments
Small-cap stocks plunged on the opening, pulled down by hawkish inflation comments overnight from Federal Reserve Chairman Ben Bernanke, who said that the central bank will resist rising long-term inflation. His comments stoked stagflation fears and sent a shiver through already embattled financial shares, which fear higher interest rates. At 9:56 a.m. ET, the Russell 2000 (NYSE:IWM) was off 4.77, or 0.65%, at 730.48.
Bernanke also said that the risk of a substantial downturn in the economy has eased, which hints that the Fed has shifted into a “fight inflation” mode. If so, then the next move from the Fed could be a rate hike, which would raise the price of money, boost rates and seemingly support the U.S. dollar. Indeed, the greenback jumped overnight on the Bernanke remarks, climbing to three-month highs against the yen, and rising about 0.9% versus the euro. The dollar managed to remain higher despite a sloppy monthly trade report, which showed the U.S. deficit climb to $ 60.9 billion, above the forecast for a deficit of $59.9 billion.
Despite the jump in the U.S. dollar this morning, crude oil prices were higher, rising back above $137 overnight as supply jitters countered softer demand from lofty prices. The OPEC Secretary General said the energy market was “panicking” and that there was no shortage of oil now or in the future. That said, Russia’s Gazprom, which supplies a quarter of Europe’s natural gas, predicted crude oil prices could double within 18 months, reaching $250 dollars a barrel in 2009. Right into the U.S. stock market opening, crude oil prices did pull off the highs, and gold was down $2 dollars. As the day progresses, it will be interesting to see if commodity markets are shaken by the Fed’s heightened inflation focus and the upside pop in the dollar. From a long-term perspective, the dollar is still historically low, which bolsters demand for many commodity goods that are priced in dollar units.
Right now, investors are concerned that the United States could limp into a stagflation stage in which high prices combine with a stagnant economy to cripple corporate input costs and rob consumer purchasing power. These fears are also surfacing at a time when small caps are coming off six-month highs, perhaps providing a higher ledge from which to fall.
Speaking of tumbling off a cliff, global equity markets were hit hard overnight on the Bernanke comments. China collapsed 8.1%, Hong Kong was down 4.2%, Taiwan down 2.5%, Singapore down 1.6%, South Korea down 2%, Australia off 2.7% and India down 1.1%.
Large-cap banks this morning were on the defensive once again, with Bank of America (NYSE:BAC) off 0.6% and Wachovia (NYSE:WB) down 1.3%. Also, in the financial arena, Lehman Bros. (NYSE:LEH) was down 1.3%, Merrill Lynch (NYSE:MER) off 1.3% and JP Morgan (NYSE:JPM) down 0.4%. Financial stocks remain a drag on large-cap index products, with the S&P 500 dipping Monday to the lowest point since April 16.
Broad market sectors under pressure this morning were not relegated to just financial shares. Gold, automobile manufacturers, paper products, coal and steel were all attracting sellers. On the upside, soft drinks were the best performers.
Small caps of note included CMGI Inc. (Nasdaq:CMGI), which tumbled 18% on sloppy earnings news. Synchronoss Technologies (Nasdaq:SNCR) slipped nearly 12%, gapping lower without any apparent fresh news. Pinnacle Airlines Corp. (Nasdaq:PNCL) gapped lower, and shed about 25% of its value early today, pressured by news that Delta has decided to terminate its contract with Pinnacle as a connection carrier. The stock made new lows on the move, and is currently trading new $4.58, compared with a peak above $20 a year ago. On the upside, HireRight Inc. (Nasdaq:HIRE) soared 45% on unusually brisk volume, gapping to 52-week highs.
Looking at the chart picture, today is shaping up as a critical day for small caps. The Russell 2000 is rapidly approaching the first support point at 726. Below there, key intermediate support is at 720.50. If that point is broken with conviction this week, then the next major downside target is at 690. If the market can stabilize today, then resistance will be up at 741.
