Decline In Oil Prices Drags Markets Down

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Fresh weakness in oil is dragging U.S. stocks lower at the open today, following up on across-the-board weakness in European markets. The data docket is relatively on the light side today and the rest of this week, with the Fed Chairwoman's two-day Congressional testimony on Wednesday and Thursday as the most notable event.

Chinese markets are closed today for the lunar New Year holiday, but the release over the weekend of a big drop in the country's foreign exchange reserves highlights the country's challenge to stem capital flight and a stable exchange rate. China's foreign exchange reserves dropped $99.5 billion in January, which follows the $107.9 billion drop the month before.

The country still has the world's largest foreign exchange reserves, but the central bank has continuously been dipping into that cash hoard since the August 2015 devaluation to keep the currency from losing excessive ground. This hasn't been a particularly successful effort as the interventions end up hurting market confidence, which require even more intervention.

The China questions have been very destabilizing for the markets, with many market participants hoping that the Fed will factor that into their model while setting monetary policy. Friday's mixed jobs reading gave a modest bump to the market's expectations of a March rate hike, but the overall odds of a rate hike next month remain low.

Unless the data weakens in a major way in the coming days, the next rate hike is likely a June event. The Chairwoman's Congressional testimony later this week could potentially shed more light on this issue, but she will most likely reiterate the January FOMC position when they left the door open for a March hike.

Related to the Fed outlook is the continued momentum in the U.S. dollar, which has emerged as a major headwind for corporate earnings and the health of the country's manufacturing and export sectors. With respect to earnings, we are currently in the midst of the 2015 Q4 reporting cycle, with earnings growth on track to be below the year-earlier level for the third quarter in a row.

Not all of the growth challenge is due to weakness in the Energy sector, but not much offsets momentum in other sectors. The emerging picture for the current and coming quarters is no better, with estimates coming down at an accelerated pace lately.

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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