- Invstors fearing risks of a global economic slowdown, weighing on US stocks.
- Lowest headline manufacturing ISM reading since 2009 which has reinforced prospects of further Fed cuts.
While it is all eyes on the US nonfarm Payrolls report due at the end of this week, the US data today, considered as a prelude as to what to expect in the jobs data on Friday, showed the lowest headline manufacturing ISM reading since 2009 which has reinforced prospects of further, yet, ‘reactive’, action from the Federal Reserve.
While softer monetary policy from the Fed would usually be considered good news in stocks markets, it is when the Fed has to react to negative economic performance that investors begin to worry and hence we have seen a major sell-off in the benchmarks today.
“The drop in the headline ISM manufacturing index is a huge surprise,” analysts at ING Bank explained:
“It is has fallen to a 10-year low of 47.8, leaving the index well below the 50 breakeven level. In fact, it was below every single forecast in the market with the production, export orders and employment components looking particularly weak. These figures suggest that further output declines are likely and point to downside risks for Friday’s US jobs report,”
the analysts explained, adding,
“the ISM manufacturing index has dropped to a 10-year low as trade worries, weak global growth and a strong dollar weigh on the sector. Given the threat of contagion to other parts of the economy further Fed rate cuts are coming.”
How benchmarks performed
Immediately after the data, the Dow Jones Industrial Average, DJIA, was down by 261 points, or 1%, to reach 26,656, the S&P 500 index was losing 26 points to 2,950, a loss of 0.9% while the Nasdaq Composite index was down by 56 points, or 0.7%, to reach 7,943.
Analysts at Rabobank explained that at the heart of the slowdown is a downturn in global manufacturing that’s already visible in Asia, spilling over into Europe and eventually set to hit the United States.
“The trade war isn’t the primary cause per se, but it certainly isn’t helping, nor is it going away. We forecast a US recession in 2020H2, with the timing based on a yield curve inversion model that’s been a strong indicator in the past. The global downturn is still a relatively modest affair in our spreadsheets and models, but the key risk is for a financial crisis to team up and blow it out of the water.”
DJIA levels
The index was finding support on the 21-day moving average but test trend-line resistance around 27000 wa too mich and the bears have taken the index down to test the 50-DMA now. A break there opens risk of a 50% mean reversion of the August to recent swing highs at 26379 which guards territory down to the low 26000s that meets a 61.8% retracement.
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