Daily Market Reports | Jan 24 2014
By Greg Peel
The Dow fell 175 points or 1.1% while the S&P lost 0.9% to 1828 and the Nasdaq dropped 0.6%.
Bridge Street was once again grinding back from an early fall yesterday morning, at least up until 12.30pm. At that point HSBC released its flash estimate of China’s January manufacturing PMI and down we went. The estimate came in at 49.6, down from 50.5 in December, below forecasts of 50.3, and into contraction territory.
The weak reading comes in a week in which the PBoC was forced to inject liquidity into the Chinese banking system, and a few days before China shuts down for over a week for the New Year celebrations.
An equivalent US flash manufacturing PMI showed a fall to 53.7 from 55.0 in December. The latter had been the highest reading in eleven months. Wall Street was not overly worried about the US result given snow was once again cited as a factor in the reading. By contrast, the eurozone flash manufacturing PMI rose to 53.9 from 52.7, while the flash services PMI rose to 51.9 from 51.0.
After five years of post-GFC fear and loathing, it is the developed markets now driving positive global sentiment and the emerging markets causing increasing concern. As the US economy recovers and the greenback rises on Fed tapering, investors are pulling money out of emerging market investments and bringing it back home. Europe, for many years the world’s biggest problem, is now the star performer, with the UK the superstar. Brazil and Russia have seen their stock markets fall significantly in recent weeks. China’s economy is now very much in the spotlight as Beijing wrestles with the conundrum of how to reform financial markets and tackle shadow banking and excess debt while still encouraging growth.
China is a concern for many, but on Wall Street last night the general feeling was one of inevitability. The US stock market is now well overdue for a correction in historical terms, having last seen a 10% pullback in 2012. Quarterly earnings results to date have been a little softer than hoped and revenue growth continues to remain elusive. The Fed is now reining in the stimulus. Wall Street has been looking wobbly around all-time highs all January. Yesterday’s Chinese data may well offer cause for concern but the pervading view last night was that China is simply the trigger that was needed. Most of Wall Street has been begging for a pullback for months.
While China’s PMI was contracting, US existing home sales reversed a three-month trend by rising 1% in December to be up 9.1% for the year. The median sales price rose 11.5% over 2013.
A 0.9% fall in the S&P 500 does not a correction make, and if 2013 is any guide, the buyers may still move in well before a meaningful correction can be posted. An interesting point to note is that while the VIX volatility index on the S&P 500 jumped 8% last night, its level of 13.9 is very much still suggesting a lack of any real concern.
Elsewhere, sharp reversal moves were seen across the various markets. The US dollar index fell 0.9% to 80.45. The US ten-year bond yield fell 9 basis points to 2.77%. Gold jumped US$24.70 to US$1264.40/oz. The Aussie dropped 1% to US$0.8765.
We want the Aussie to fall because the greenback is strong, not because China is weak.
Copper fell 1% in London as all the base metals posted 1-2% falls. Brent crude fell US72c to US$107.40/bbl but with West Texas crude now flowing to the Gulf, the WTI price bucked the trend with a US52c gain to US$97.25/bbl.
Perhaps ironically, spot iron ore rose by US40c to US$123.90/t.
Bridge Street arguably had its fall yesterday — a full 1.1% — so to fall again on Wall Street’s response would be double-counting. But the SPI Overnight is down 34 points or 0.7%, suggesting there’s likely more weakness to come yet.
Bear in mind we have a long weekend in Australia and next Wednesday China blacks out for a week. On Wednesday night the Fed meets and, it is presumed, announces further tapering, and the following week the Australian earnings season begins in earnest.
Good time to lock in profits?
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