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China Syndrome: Street Stumbles on Weak Chinese Manufacturing Data, Dollar

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May 3, 2016

(Tuesday Market Open) China continues to haunt markets, as disappointing manufacturing data from the Asian giant tripped up U.S. and European stocks early Tuesday. The U.S. dollar also continued to fall against the euro and yen, providing another source of pressure.

There’s a lot of concern about Chinese manufacturing data, with the China Caixin manufacturing PMI falling to 49.4 last month from March's 49.7, below market expectations for 49.9. Levels under 50 indicate contraction. This marked the 14th-consecutive month of shrinkage for the PMI. Additionally, the International Monetary Fund (IMF) issued a report Tuesday saying China and Japan continue to face challenges, and that China’s slower growth could “disrupt” its regional partners.

China’s slumping economy recently helped lead to disappointing earnings reports for some major U.S. companies, notably Apple (AAPL). China played a big role in the U.S. stock market’s decline earlier this year, but receded as a factor during the rally of March and early April. Now it seems to once again be stepping into the spotlight.

Dollar weakness also continued early Tuesday, weighing on U.S. stocks. The euro was up 0.5% against the dollar at $1.586, and posted its highest level against the dollar in eight months. And the yen hit an 18-month high, with the dollar recently down 0.6% against the yen at 105.8040. There continues to be concern about what’s going on in economies worldwide, so the probability of rates being raised isn’t necessarily so high any more. Low interest rates tend to keep the dollar weaker.

Speaking of rates, Australia cut rates in a surprise move on Tuesday. Most economists thought Australia would leave rates alone, so this move may mean the Australian economy is weaker than expected.

For the S&P 500 Index (SPX), 2050 remains a key support level. Keep in mind that despite recent losses, the market is still up sharply from the lows of mid-February. Volatility could continue throughout this week and perhaps the next couple of weeks, as there are worldwide questions about the economy. Not just about the U.S. economy, but about economies everywhere. There seems to be an asset re-pricing going on because of all these fears and weakness coming in. People aren’t sure what things are worth compared to where they were a few weeks ago.

S&P 500

FIGURE 1: SUPPORT STILL AT 2050.

The S&P 500 (SPX), plotted through the end of Monday on the TD Ameritrade thinkorswim platform, was trending lower early Tuesday, with support still at the 2050 level. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

U.S. Manufacturing Data Lukewarm: Manufacturing data from the U.S. released Monday failed to show much in the way of growth for the economy, with the U.S. manufacturing sector’s PMI falling to the lowest level for April since 2009. The ISM purchasing managers' index slipped to 50.8% in April from 51.5% in March. Economists have been watching the ISM data closely for any hints of resurgence in the sluggish U.S. economy, and some had considered the March data a sign of life. The April data may serve to help mute those hopes. Still, anything over 50% is considered expansionary, so things aren’t completely bleak.

Caution: Fed Speakers Ahead: With last week’s FOMC meeting out of the way, Fed speakers are back on the circuit this week. It starts today with Loretta Mester, Cleveland Fed President, who’s chairing a panel at 10:30 a.m. ET at the Atlanta Fed’s annual Financial Markets Conference. Then Atlanta Fed President Dennis Lockhart speaks in Jacksonville, Fla., tonight. On Wednesday evening, Minneapolis Fed President Neel Kashkari is scheduled to hold a town hall meeting in Rochester, Minn. On Thursday morning, James Bullard, St. Louis Fed President, speaks in California. Finally, Thursday night, investors hear from several Fed Presidents, who are gathering at Stanford University for a panel discussion on international monetary policy and reform. As always, any time a Fed official speaks out, there’s potential for the markets to move, especially with uncertainty still out there about the Fed’s rate policy for the remainder of the year.

Frackers’ Delight? Oil Approaching Break-Even for Some Producers: Crude oil fell to near $26 a barrel in February and since then has clawed back all the way to around $44. But a natural barrier may be approaching. U.S. frackers’ break-even costs for production are about $50 a barrel, Barron’s noted in its latest issue. That gives the U.S. a chance to replace Saudi Arabia as the world’s “swing producer,” because frackers can rapidly bring on new productive capacity as the oil price rises above $50. As a result, oil prices might be pinned at $60 a barrel or lower for at least the next year, Barron’s said, citing energy guru Daniel Yergin, despite all the cuts in global exploration budgets and production levels. U.S. oil production has fallen under 9 million barrels a day as rig counts fell during the commodity’s recent slump, but reached highs of 9.6 million barrels a day at times last year. That compares with production of below 5 million barrels a day a decade ago, before fracking became widespread.

Good Trading,
JJ
@TDAJJKinahan

Economic Report Calendar

FIGURE 2: THIS WEEK'S ECONOMIC REPORT CALENDAR.

Source: Briefing.com

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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