Inflation worries and rising oil take toll on US Market

Crude prices nearing $130 and a bunch of disappointing news at financial sector push market down

US market ended the day with substantial losses today, Tuesday, 20 May, 2008. A higher-than-expected core inflation reading together with all time high crude prices soured market sentiments today. Financials turned out to be the biggest laggards and weighed on the market for the entire day. Seven out of ten sectors ended the session in negative territory, led by the telecom and financials sector. Energy, materials and utilities were the only sectors to end in the green.

Crude-oil futures closed above $129 a barrel for the first time ever today. Crude oil rose for a third straight session after billionaire hedge-fund manager Boone Pickens said prices will reach $150 a barrel this year as demand outpaces supply. A strengthening of the euro against the dollar added to the gains. The dollar fell after the International Monetary Fund said the U.S. housing slump still poses serious risks to financial markets.

The Dow Jones industrial Average ended the day with a loss of 200 points at 12,828. The Nasdaq Composite Index, finished lower by 23.83 points at 2,492.26. S&P 500 finished lower by 13.23 points at 1,413.4.

Twenty-eight out of thirty Dow components ended the day in red. The financial stocks – AIG, JP Morgan, Citigroup and American Express were the topmost losers. The energy stocks – Exon Mobil and Chevron turned out to be the only two Dow winners.

The Dow also came under pressure today after one of its main components Home Depot acted as the largest drag with a decline of 5.5%, which was the largest one-day loss in more than five years. Market are disappointed with the home improvement retailer's 66% drop in net income, though the results were good enough to top analysts' low expectations.

Inflation concerns were fueled today once again after a report showed wholesale prices outside of food and energy rose the most in about 17 years. Core producer prices, which exclude food and energy, rose a higher-than-expected 0.4% in April, or 3% year-on-year - the fastest rise since late 1991. The April Producer Price Index (PPI) rose 0.2%. Market expected the opposite, forecasting a 0.4% rise in PPI and a 0.2% rise in core-PPI.

Financials too were under pressure following a number of reasons. First and foremost, Goldman Sachs and Morgan Stanley had their second quarter earnings estimates cut at Lehman Brothers. AIG was also under selling pressure after the company said it will raise a total of $20 billion, up from its previous plan to raise $12.5 billion. Also, Oppenheimer analyst was reported to have said that the credit crisis will extend well into 2009, and may go on even longer.

Crude-oil futures for light sweet crude for June delivery today closed at $129.07/barrel (higher by $2.02/barrel or 1.6%) on the New York Mercantile Exchange. Price touched a high of $129.6 earlier during the day. The June contract expired today. The more-active July futures contract rose $2.26 (1.8%) to settle at $128.98 a barrel.

Trading volumes reached 1.2 billion shares exchanging hands on the New York Stock Exchange, with decliners outpacing gainers by 2 to 1. On the Nasdaq stock market, 844 million shares traded, with 17 shares falling for every 11 gainers.

For tomorrow, the weekly crude oil inventory report is due from the Energy Information Administration. The minutes from the Federal Open Market Committee's April policy meeting are due midafternoon.