Stocks Tumble To 3-Month Lows After Another Chinese Sell-Off - U.S. Commentary

(RTTNews) - Extending the sharp downward move seen over the past several sessions, stocks saw substantial weakness during trading on Thursday. The steep losses on the day dragged the major averages down to their worst closing levels in three months.

The major averages moved roughly sideways going into the close, stuck firmly in the red. The Dow plunged 392.41 points or 2.3 percent to 16,514.10, the Nasdaq plummeted 146.34 points or 3 percent to 4,689.43 and the S&P 500 tumbled 47.17 points or 2.4 percent to 1,943.09.

The sell-off on Wall Street came as Chinese stocks showed another substantial decrease, with the Shanghai Composite Index plunging by more than 7 percent in brief trading.

Chinese trading was halted for the second time this week as a result of the sell-off, which came after the People's Bank of China set the yuan's daily reference rate at the lowest level since April of 2011.

The China Securities Regulatory Commission has subsequently suspended its circuit breaker system amid concerns the system is contributing to the recent volatility.

David Rees, Senior Markets Economist at Capital Economics, said the move the PBoC reinforced fears of a competitive devaluation but said he suspects it is poor communication by the bank rather than a deliberate devaluation.

On the U.S. economic front, the Labor Department released a report before the start of trading showing a smaller than expected pullback in initial jobless claims in the week ended January 2nd.

The report said initial jobless claims fell to 277,000, a decrease of 10,000 from the previous week's unrevised level of 287,000. Economists had expected jobless claims to drop to 272,000.

Jobless claims fell less than expected but still pulled back off the nearly six-month high set in the previous week.

Friday morning, the Labor Department is scheduled to release its more closely watched monthly employment report.

Among individual stocks, shares of Finish Line (FINL) moved sharply lower on the day after the athletic footwear and apparel retailer reported a wider than expected third quarter loss.

Printer and PC maker HP Inc. (HPQ) also posted a steep loss after Wells Fargo downgraded its rating on the stock to Market Perform from Outperform.

Meanwhile, shares of Zumiez (ZUMZ) showed a strong move to the upside after the action sports equipment retailer raised its fourth quarter guidance.

Sector News

Reflecting concerns about the outlook for Chinese demand, steel stocks saw substantial weakness on the day. The NYSE Arca Steel Index plunged by 5.3 percent to a new record closing low.

Ryerson (RYI), Allegheny Technologies (ATI), and U.S. Steel (X) turned in some of the steel sector's worst performances.

Significant weakness was also visible among airline stocks, as reflected by the 3.7 percent loss posted by the NYSE Arca Airline Index. With the loss, the index dropped to its lowest closing level in over a year.

Housing stocks also saw considerable weakness, dragging the Philadelphia Housing Sector Index down by 3.6 percent to a nearly one-year closing low. KB Home (KBH) posted a steep loss after reporting weaker than expected fourth quarter results.

Internet, biotechnology, telecom, computer hardware, and banking stocks also moved notably lower on the day, reflecting broad based weakness on Wall Street.

On the other hand, gold stocks bucked the downtrend once again, resulting in a 4.7 percent jump by the NYSE Arca Gold Bugs Index. The gain lifted the index to its best closing level in two months.

Gold stocks benefited from an increase by the price of the precious metal, as gold for February delivery climbed $15.90 to $1,107.80 an ounce.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region saw substantial weakness during trading on Thursday. Japan's Nikkei 225 Index tumbled 2.3 percent, while Hong Kong's Hang Seng Index plummeted by 3.1 percent.

The major European markets also showed significant moves to the downside on the day. While the German DAX Index plunged by 2.3 percent, the U.K.'s FTSE 100 Index and the French CAC 40 Index slumped by 2 percent and 1.7 percent, respectively.

In the bond market, treasuries showed a lack of direction as the day progressed before closing moderately higher. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, dipped 2.4 basis points to 2.153 percent.

Looking Ahead

While developments in China are likely to remain in focus on Friday, traders are likely to keep a close eye on the Labor Department's monthly jobs report.

Employment is expected to climb by 200,000 jobs in December following an increase of 211,000 jobs in November, while the unemployment rate is expected to hold at 5.0 percent.