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Rally Runs Out of Steam as Growth Worries Return

Worries about a global economic slowdown choked this week’s risk rally and puts the focus on Thursday’s U.S. economic reports, as well as developments in Europe.

Commodities traders at the New York Mercantile Exchange.
Photo: Oliver Quillia for CNBC.com
Commodities traders at the New York Mercantile Exchange.

Copper, a proxy for global growth, led the decline Wednesday, losing more than 7 percent. Margin requirements on the metal were raised during the day, but the metal was already tarnished by concerns that Chinese demand is slowing.

“Commodities are getting murdered,” said Dan Greenhaus, chief global strategist at BTIG. “There’s talk Obama is going to go after China on the currency front.”

Oil also fell sharply, down 4 percent to just about $80 per barrel after U.S. inventory data showed an increase in supply.

“On top of the euro zone worries and China worries, there was a pretty good build in inventories of crude. But more importantly, demand was down across all products — crude, heating oil, diesel fuel,” said John Kilduff of Again Capital. Total product demand over the past four weeks was reported Wednesday to be down 1.8 percent, compared to last year.

“Gasoline demand was down 2.4 percent. I would have expected to see it flat to slightly higher given the decline in prices we’ve seen in the past couple of weeks,” Kilduff said. “That speaks to the jobs situation.”

The Dow fell 1.6 percent to 11,010 and the S&P 500 was off 2 percent at 1,151. “Two things happened that I would have viewed as not bad. One is that theFinnish approvedthe EFSF (bailout fund) and second, durable goods were betterthan expected,” said Greenhaus.

During the day, Italy and Spain extended the temporary ban on shorting bank stocks.

“The short selling ban doesn’t help matters. Nobody finds that to be particularly confidence inspiring,” he said.

“People are just on their own right now. Fundamentals don’t matter. It’s very hard to forecast,” he said.

Greenhaus said the market is currently finding support at 1,100 and resistance at about 1,250 on the S&P.

“At the end of the day, support doesn’t matter if Greece leaves the euro zone,” he said.

What to Watch

Weekly jobless claims top Thursday’s economic reports at 8:30 a.m. ET. There is also revised second-quarter GDP, expected at 1.2 percent. Claims are expected to be about 420,000. July pending home sales are reported at 10 a.m. ET.

In Europe, the so-called “troika” of International Monetary Fund , European Union and European Central Bank officials returns to Athens to investigate Greece’s progress reining in expenditures. If satisfied, the group could clear the way for Greece to get its next aid package.

Germany’s lower house votes on enhancements to the EFSF, the European Financial Stability Facility. All 17 countries of the euro zone must approve it.

Traders will also be watching an Italian auction of 5.5 billion to 9 billion euros worth of bonds.

According to Greenhaus, the market is also starting to focus on whether the Obama Administration would support a Senate bill that would threaten economic sanctions if the Treasury Department finds a trading partner’s policies cause its currency to be misaligned. The U.S. has been careful not to label China a currency manipulator.

On Wednesday, Sen. Orrin Hatch of Utah, the ranking Republican on the Senate Finance Committee, sent Treasury Secretary Timothy Geithner and U.S. Trade Representative Ron Kirk a letter asking for the Administration’s view on pending currency legislation by Monday, when the Senate is expected to vote on a motion to begin debate on the currency bill.

Philadelphia Federal Reserve President Charles Plosser speaks on the economic outlook at 8:30 a.m. ET in Radnor, Pa.

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