Daily Market Reports | Mar 23 2012
By Greg Peel
The Dow closed down 78 points or 0.6% while the S&P lost 0.7% to 1392 and the Nasdaq fell 0.4%.
There was much excitement on Wall Street a week ago amidst more positive US economic data when the indices claimed a psychological triple-whammy of Dow 13,000, Nasdaq 3,000 and S&P 1,400. However, the excitement gave way to frustration as it appeared too many traders were calling the rally from the November lows too sharp and overdone, sparking profit-taking ahead of the March quarter close.
This week has seen mostly down-sessions with the slowdown in China very much in the frame as a counterweight to US improvement. That theme continued last night with the release of HSBC's “flash” estimate of China's March manufacturing PMI, posted during yesterday's Asian session.
HSBC's PMI readings, which concentrate more heavily on smaller and medium Chinese businesses and less on large state-owned businesses than Beijing's official numbers, have been hanging around in the slight contraction zone just under 50 for a while now. Yesterday the estimate came in at 48.1, down from 49.6 in February.
It would be no surprise if China's weaker manufacturing was a result of reduced export demand, given the state of China's biggest customer Europe. But the breakdown of this result showed a slowing in domestic demand and particularly in new orders, which is beginning to impact on employment growth. This is sparking anxiety among those holding fears for the Chinese property market and the potential for a hard landing to be suffered in that sector.
On the flipside, less worried analysts will always point to Beijing's monetary policy capacity. Beijing has already made reductions to the bank reserve ratio requirement beginning last year and there is always scope for a rate cut. Beijing wants its economy to slow but not crash, and if PMI numbers start looking dodgy then the expectation is Beijing will act.
News on the manufacturing front was also weak out of Europe, as last night's estimate of the eurozone composite PMI (combining manufacturing and services) came in at 48.7, down from February's reading of 49.3. Economists had expected a rise to 49.6.
Yet we might again suggest that a slowdown in Europe is hardly a surprise, and indeed is exactly what everyone expects given the “fiscal drag” of strict austerity. It is pretty much assumed Europe is now in a recession, although we'll need to wait for two negative quarters to confirm. The real debate is as to how deep and how enduring the European recession will prove to be. With the ECB's printers running 24/7, consensus has Europe suffering only a shallow recession overall and returning to growth by 2013.
If there is a surprise about Wall Street's rather negative reaction last night it's that Americans seem more jittery than anyone else at present and they're the ones with the improving data. The reaction in China to the fall for the Chinese PMI was only a 0.1% fall in the Shanghai index, and Hong Kong was up 0.2%. Australia didn't seemed to worried yesterday, also posting a gain in the ASX 200. European markets were pretty weak of course, but that's because of the European data. The US put the two together and thought “If I don't take profits now my March quarter result is not going to look nearly as good as it had been”.
If Australia shrugged off the Chinese data yesterday, it may well make up for it today with the SPI Overnight showing down 43 points, or 1.0%. It seems we need Wall Street to tell us what to do.
Wall Street weakness also came despite another promising fall in weekly new jobless claims, which in any other session would have been a positive impetus. The improving jobs picture helped the Conference Board's leading economic index to a 0.7% rise in February, pointing to continued growth in the northern summer. And the FHFA house price index of houses with Fannie/Freddie mortgages was unchanged in January, which is at least better than down.
The euro had a tumble last night but the yen is on the increase again against the US dollar, meaning the US dollar index is up only slightly to 79.71. If Australia didn't cop it on the stock market, it made up for it in the currency with a 0.7% fall to US$1.0384. There has been more than one report out lately from local currency analysts suggesting the Aussie is destined to push up to US$1.10 by year's end on interest rate differentials, but interestingly near term weakness was expected as well with a pullback to US$1.03 suggested.
Gold was down a bit last night again, falling US$6.50 to US$1643.30/oz and is getting closer to challenging that 1640 technical support level. Base metals copped a bit of a hiding on the weak Europe/China combo and were all down 2-3%. Oil could not escape either, with Brent down US$1.06 to US$123.14/bbl and West Texas down US$1.87 to US$105.40/bbl.
Looking to the risk indicators, US bonds have seen a slight pullback in yield this week as equities have soured but no wholesale purchases, with the ten-year last night down only 2bps to 2.27%. And the VIX volatility index is not showing any signs of major investor concern as it sits quietly at 15.
There is a feeling that perhaps Wall Street does really need to see a decent correction before it can reestablish a more solid upward trend, if that is to be the case. The risk now is that Dow 13k and Nasdaq 3k will be broken and if that occurs, we may see a more substantial near term sell-off.
The SPI Overnight, as noted, was down 43 points or 1.0%.
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