|
Concerns about China’s economic hard landing have been raised throughout the week as the data from China were weak. The Chinese Government said on Tuesday that China’s official manufacturing purchasing managers index (PMI) fell to 49.7 in August from 50 a month ago, missing the market forecasts of 49.8. A PMI reading below 50 indicates contraction in the sector and a reading above 50 indicates expansion. The government’s non-manufacturing PMI also released on Tuesday, fell to 53.4 from 53.9 in July.
Separately, the final Caixin China Manufacturing Purchasing Managers’ index came in on Tuesday at a more than six-year low of 47.3 in August, from 47.8 in July, according to publisher Caixin Media Co. and research firm Markit, which compiles the index. The Caixin China Services Purchasing Managers’ index fell to 51.5 in August, from 53.8 in July, the slowest increase in 13 months..
The forward looking data for the U.S. economy is still a mixed bag. The Institute for Supply Management (ISM) said on Tuesday that its U.S. Manufacturing Purchasing Managers index fell to 51.1 in August from 52.7 in July, the weakest reading since May 2013. Economists surveyed by The Wall Street Journal had expected the August PMI to hold steady at 52.7. So, it is a miss.
The ISM non-manufacturing/service sector index for August, released on Thursday, fell to 59.00 in August from 60.3 in July, but better than the expectation of 58.2. Although the ISM non-manufacturing sector index is still holding up well, things could dramatically change if the U.S. and China financial market routs continue.
Weak ISM manufacturing data came on the heels of a decelerating core personal consumption expenditures (PCE) price index in July of 1.2% from 1.29% in June 2015, the lowest level since March 2011 and well below the FOMC's longer-run objective of 2%.
The Federal Reserve, however, seems to be rosy on the U.S. economy as their Beige Book, which is practically a summarized report on current economic conditions in each of the Fed’s 12 districts, said Wednesday that the U.S. economy expanded across most regions and industries in July and August as tighter labor markets boosted wages for some workers.
The global economic slowdown has triggered a return of the deflation, worldwide. On Thursday, the European Central Bank (ECB) downgraded its inflation forecast for next year to 1.1%, from its June forecast of 1.5%, and the eurozone GDP growth in 2016 to 1.7%, from its June forecast of 1.9%. ECB President Mario Draghi said the central bank could extend the 60 billion euro monthly bond-buying or quantitative easing (QE) program beyond its original deadline of September 2016.
A big surprise for the week was the U.S. non-farm payrolls report released on Friday by the Labor Department that came in at 174,000 for August, well below Wall Street economists' expectations of 222,000. The jobs reports missed expectations for three months straight.
The U.S. unemployment rate fell to 5.1%, from 5.3%, the lowest since early 2008, as more than 261,000 people left the labor force in August, pushing the labor force participation rate to a 38-year low at 62.6%, meaning 94 million Americans, 16 years and older, did not have a job and were not actively trying to find one.
David Kelly of J.P. Morgan Funds told CNBC that this is still a strong number, given the fact that the August jobs report numbers are often revised up the next month. On Wall Street, the fact is this, “A miss is still a miss!”.
The S&P 500 tumbled 1.51% on Friday, after the disappointing non-farm payrolls report. The U.S. 10-Year Treasury Note yield dipped 2.29% while the U.S. dollar was weak. Currency traders were selling the U.S. dollar, British pound and euro and moved their cash into the Japanese yen as a safe-haven trade. The USD/JPY currency pair tumbled 1.22%, to as low as 118.61 yen per dollar, while the EUR/JPY dipped 1% to an intraday low of 132.23 yen per euro on Friday.
It seems that the market is now questioning whether the U.S. economy is strong enough to take a Federal Reserve rate hike if they decide to move on September 17.
As of September 1, there are 169,043 short positions of S&P 500 Futures, (CME:SP), traded on the Chicago Mercantile Exchange (CME) by leveraged funds, an increase of 17,052 short positions from the previous week. This is compared to about 90,408 long positions, down 10,311 from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday.
The net short positions by hedge funds has increased by 27,363 contracts from the previous week, worth about $13.3 billion, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index. As a contrarian indicator, it could be bullish when hedge funds are piling into short positions.
The S&P 500 closed at 1,921.22 on Friday, down 3.40% for the week. The best performing S&P 500 sectors were Telecommunication services and Consumer discretionary, which dipped 2.29% and 2.32%, respectively. The worst performing S&P 500 sectors for the week were Utilities and Healthcare, which tumbled 5.18% and 4.41%, respectively.
From our short-term technical viewpoint, the S&P 500 is moving in a symmetrical triangle in the range between 1,991 and 1,867 as the market can’t decide whether the Federal Reserve will begin hiking interest rates at the September 16-17 FOMC meeting, and whether China’s economy is having a severe slowdown or if it will be a hard landing. Although the index was down for the week, the sentiment was toward bullish as the S&P 500 stayed in the upper part of the symmetrical triangle for most of the week.
As three major moving averages, 50-, 100- and 200-day SMA, are turning downward and become major head resistances, there will be some selling pressures as the S&P 500 approaches these moving averages. The sharp decline in the S&P 500 index also triggered a death cross, as the 50-day SMA fell below the 200-day SMA.
The headline risks for next week are China’s trade data on Tuesday and inflation on Thursday. The Shanghai composite index, which was closed on Thursday and Friday, could take a cue when it opens on Monday from the U.S. equity market's Friday sell-off. Federal Reserve officials also might give some hints during the week as to how they might vote at the FOMC meeting.
IMF Chief Christine Lagarde gave a third warning to the Federal Reserve, on Saturday at the G20 meeting in Istanbul, not to rush its decision to raise interest rates. We doubt that anyone in the Federal Reserve will listen. Ms. Lagarde should also remind the Federal Reserve that they should have listened to the markets in 2008, before the U.S. economy fell into the deep financial crisis. As the old German saying goes, “Wer nicht hören will, muss fühlen”, translated “If you don't want to listen, find out the hard way”.
S&P 500 Summary: –6.69% YTD as of 09/04/15
Barclay Hedge Fund Index: +0.66% YTD
Outperforming Sectors: Consumer discretionary +2.04% YTD, Healthcare +0.02% YTD, Consumer staples –4.8% YTD, Information technology –5.4% YTD and Telecommunication services –5.89% YTD.
Underperforming Sectors: Financials –8.74% YTD, Industrials –11.08% YTD, Materials –13.86% YTD, Utilities –14.0% YTD and Energy –20.87% YTD. |
