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Stocks

Wall Street sags on Fed rate expectations, North Korea crisis and weakness in Apple shares

PUBLISHED : Friday, 22 September, 2017, 7:45am
UPDATED : Friday, 22 September, 2017, 7:45am

US stock indexes slipped on Thursday as investors braced for a third interest rate hike this year and the United States ordered new sanctions against North Korea.

The S&P and the Dow snapped a run of record closing highs and Apple was the biggest drag on the three major indexes with a 1.7 per cent drop on worries about demand for its latest smartphone.

Investors increased bets the US Federal Reserve would raise rates again this year after the central bank’s statement on Wednesday and were also assessing its decision to start reducing its roughly US$4.2 trillion in US Treasury bonds and mortgage-backed securities.

US President Donald Trump opened the door to blacklisting people and entities doing business with North Korea, further tightening the screws on Pyongyang’s nuclear and missile programmes.

Trump orders new sanctions on North Korea and praises China for telling banks to shun Pyongyang

“The Fed had investors on edge already. Ratcheting up of North Korea tensions can put investors in a little more of a risk-off mode,” said Chris Zaccarelli, chief investment officer at Cornerstone Financial Partners, in Huntersville, North Carolina.

However, with the CBOE Volatility Index closing at its lowest level in nearly two months at 9.67, Peter Cecchini, chief market strategist at Cantor Fitzgerald in New York, said the market is not reflecting risks such as US-North Korea tensions and high valuations.

The market is “very complacent and very comfortable in its own skin right now and not really concerned about risk much at all,” said Cecchini: “I’m worried about that.”

The Dow Jones Industrial Average fell 53.36 points, or 0.24 per cent, to 22,359.23, the S&P 500 lost 7.64 points, or 0.30 per cent, to 2,500.6 and the Nasdaq Composite dropped 33.35 points, or 0.52 per cent, to 6,422.69.

Fed Chair Janet Yellen said the fall in inflation this year remained a mystery, adding that the central bank was ready to change the interest rate outlook if needed.

Investors were pricing in about a 70 per cent chance of a December hike, according to CME’s FedWatch tool, up from about 51 per cent just before the Fed statement.

Only two of the 11 major S&P sectors – financials and industrials – were higher, with gains of 0.2 per cent and 0.3 per cent. The consumer staples index was the biggest decliner, down 0.97 per cent drop.

Financial stocks have been on a tear in recent days as investors anticipated and then reacted to Fed commentary on rate hikes, which tend to help bank profits.

The S&P has risen about 11.7 per cent so far this year, helped by strong corporate profits and lingering optimism among some investors that Trump will cut taxes for businesses.

This has boosted valuations. The S&P is trading at roughly 17.6 times expected earnings, well above its 10-year average of 14.3, according to Thomson Reuters Datastream.

“It’s very hard for me to see a tremendous catalyst for the upside, although I also don’t see that massive catalyst to create a crack to the downside,” said Cantor’s Cecchini.

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