Summary

The major domestic equity indexes were lower on Wednesday after a choppy trading session because of worries that China would slow government bond purchases and that the Administration would end a key trade agreement.

The S&P 500 and the Nasdaq indexes snapped a six-day rally after Bloomberg reported that China, the world’s largest holder of Treasuries, could slow or stop buying the government bonds.

Investors were particularly skittish about the China report as they worried that the market was overdue for a correction. The report sent Treasury yields to a 10-month high.

The S&P 500 pared some losses as yields backed away from their intraday peaks and investors digested the China report.

However, the index lost ground again in mid-afternoon trading after Reuters reported that Canada is increasingly convinced Trump will soon announce our exit from the North American Free Trade Agreement. It cited two unnamed government sources.

The S&P financial index was the best performer among the S&P 500’s 11 major sectors with a 0.9 percent rise, helped by gains in Berkshire Hathaway, JPMorgan, and Wells Fargo.

Banks and insurance companies often rise with bond yields as investors expect a profit gain from higher interest rates. Rate-sensitive sectors such as utilities and real estate saw the largest declines, about 1.1 percent and 1.5 percent respectively.

Investors started 2018 with high hopes for strong earnings growth. Banks will kick off earnings season on Friday.

Earnings for S&P 500 companies are expected to increase by 11.8 percent, with the biggest contribution from the energy sector, according to Thomson Reuters I/B/E/S.

Berkshire Hathaway rose 1.3 percent after the conglomerate promoted two top executives, cementing their status as the most likely successors to Warren Buffett.

Approximately 6.93 billion shares changed hands on the major domestic equity exchanges, a number that was above the 6.38 billion average for the full session over the last 20 trading days.

Wholesale Inventories Rise

The Commerce Department reported on Wednesday morning that wholesale inventories rose slightly more than initially estimated in November, suggesting that inventory investment will probably contribute to economic growth in the fourth quarter.

Specifically, wholesale inventories rebounded 0.8 percent after dropping 0.4 percent in October. The department reported last month that wholesale inventories jumped 0.7 percent in November.

The component of wholesale inventories that goes into the calculation of gross domestic product – wholesale stocks excluding autos – also increased 0.8 percent in November.

Inventory investment contributed almost eight-tenths of a percentage point to the economy’s 3.2 percent annualized growth pace in the third quarter. Inventory investment accelerated in the third quarter after slowing sharply at the start of 2017.

Auto inventories increased 0.7 percent in November, reversing October’s 0.7 percent drop. There were also increases in inventories of petroleum, machinery and electrical goods.

Sales at wholesalers rose 1.5 percent in November after increasing 0.8 percent in October. Sales of motor vehicles rose 1.2 percent in November after jumping 3.4 percent the prior month.

At November’s sales pace it would take wholesalers 1.24 months to clear shelves, the fewest since November 2014, down from 1.25 months in October.

Crude Prices Up and Down

Crude oil prices rose but backed away from three-year highs on Wednesday after government data indicated an increase in fuel inventories and a falloff in refining activity.

Crude inventories fell 4.9 million barrels last week, more than the 3.9-million decline forecast, but larger-than-expected builds in gasoline and fuel stocks offset that drawdown, the Energy Information Administration reported.

The market was also bolstered modestly by data showing a sharp decline in domestic production last week that may have been the result of the recent extremely cold temperatures so far this year.

West Texas Intermediate futures were at $63.33 a barrel, up 37 cents at around 1:00 PM. Earlier in the session, prices hit $63.67, their highest since Dec. 9, 2014. Brent crude futures were at $68.96 a barrel, 14 cents above their last close. The global benchmark earlier hit $69.37, its highest since May 2015.

The oil market has been buoyant in the last several weeks, with domestic crude futures at highs not seen since late 2014, and Brent crude less than $1 per barrel away from a milestone that would, too, be a high point since that same time.

Oil prices have risen more than 13 percent since early December, and there are indications of overheating. Analysts warned that the market is ignoring U.S. production increases at its peril.

The rally has brought out some concerns that the market could overheat, especially as domestic production is expected to rise to new records later in the year.

On Tuesday, the EIA raised its expectations for production in coming months, and now sees overall production at record highs, surpassing 11 million barrels per day (bpd) by 2019.

Domestic crude oil production is expected to hit 10 million bpd next month, leaving only Russia and Saudi Arabia at higher levels.

Members of the Organization of the Petroleum Exporting Countries fear current price gains could prompt our shale oil companies to flood the market. OPEC, along with non-members including Russia, cut supply by 1.8 million bpd in a late 2016 agreement that has been extended through the end of this year. The cuts were aimed at reducing a global supply overhang that had dogged oil markets since 2014.