Credit: Shutterstock photoChina's sluggish economic growth and slump in crude oil prices dragged benchmarks lower on Wednesday. Global oil prices touched a 11 year low on weak data from China. The world's second largest economy's service sector activity expanded at a slower pace in December. Additionally, persistent supply glut and a stronger dollar also adversely affected oil prices. Meanwhile, North Korea's claim that the country successfully carried out a nuclear test on Wednesday added to the bearish sentiment.
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The Dow Jones Industrial Average (DJI) declined 252.15 points or 1.5% to close at 16,906.51. The Standard & Poor's 500 (S&P 500) dropped 1.3% to close at 1,990.26. The tech-laden Nasdaq Composite Index closed at 4,835.77, decreasing 1.1%. The fear-gauge CBOE Volatility Index (VIX) surged 6.5% to settle at 20.59. A total of around 8.2 billion shares were traded on Wednesday, higher than the last 20-session average of 7.1 billion. Decliners outpaced advancing stocks on the NYSE. For 73% stocks that declined, 25% advanced.
Weak Chinese economic data raised concerns about decelerating growth in the world's second largest economy, which eventually had a negative impact on the broader markets. According to Caixin Media Co. and research firm Markit, the Caixin China services purchasing managers' index dropped to 50.2 in December from 51.2 in November. The reading was close to 50 that separates expansion from contraction. This discouraging service sector reading followed disappointing report on China's manufacturing activity that dragged benchmarks lower on the first trading day of 2016.
Additionally, China's central bank guided the yuan to a five year low in off-shore trading on Wednesday, which raised expectations of further weakness in Chinese economy. However, China believes that this move to devalue its currency will boost its ailing export industries.
Global oil prices took a beating on Wednesday after bearish economic data from China raised concerns about demand for oil in an already oversupplied market. The Brent Crude oil plunged 6.4% to close at $34.23, while the WTI Crude oil also tanked 5.9% to settle at $33.97. Brent crude fell below $35 a barrel for the first time in 11 years. The WTI crude oil also settled at its lowest level since Feb 2004.
Decline in oil prices had a negative impact on energy shares. The Energy Select Sector SPDR (XLE) declined 3.9%, the highest among the S&P 500 sectors. Dow components Exxon Mobil Corporation ( XOM ) and Chevron Corporation ( CVX ) dropped 0.8% and 3.9%, respectively. Other key stocks from the energy sector such as EOG Resources, Inc. ( EOG ), ConocoPhillips ( COP ) and Schlumberger Limited ( SLB ) decreased 4%, 4.3% and 2.6%, respectively.
The Materials Select Sector SPDR ETF (XLB) dropped 2.6% and was the second biggest loser among the S&P 500 sectors. Key stocks from the sector including Freeport-McMoRan Inc. ( FCX ), Monsanto Company ( MON ), The Dow Chemical Company ( DOW ), Praxair Inc. ( PX ) and Ecolab Inc. ( ECL ) decreased 8.1%, 1.6%, 2.2%, 1% and 4.3%, respectively. Overall, yesterday's losses were broad based, with all 12 sectors of the S&P 500 ending in the red.
Adding to investors' concerns was North Korea's claim that the country has successfully tested a thermonuclear weapon on Wednesday. The move was viewed as a challenge for U.S.'s foreign policy and raised questions about China's ability to control its volatile ally.
Coming to the domestic front, the Institute for Supply Management reported that ISM Services Index decreased to 55.3% in December from November's reading of 55.9%. The drop was in contrast to the consensus estimate of an increase to 56.1%.
Separately, new orders for manufactured goods decreased 0.2% in November, according to the U.S. Department of Commerce. This was less than the consensus estimate of a decline of 0.4%. This reading follows an increase of 1.3% in October.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
