[Chart courtesy of MarketWatch.com]
US equity indexes started September on a weak note as investors’ concern that the economy was slowing over weak manufacturing data was somewhat tempered by hopes the European Central Bank will intervene to tame the continent’s debt crisis. Here we go again. We will find out soon if Mario Draghi’s promise to deliver a European solution actually has meaning.
The US ISM manufacturing index dropped to 49.6 in August from 49.8 a month earlier, falling short of economists’ forecast of 50. A separate report over the weekend showed China’s manufacturing shrank the fastest in August since March 2009, stoking fears of another global slowdown.
The Dow Jones Industrial Average (DJIA) closed 55 points lower, after sinking as much as 114 points earlier. Decliners outnumbered gainers 19-to-11 as breadth within the 30-stock blue-chip index turned negative.
The S&P 500 Index (SPX) lost 2 points with telecommunications and consumer staples outperforming the 10-business group index.
Treasuries fell as yield on 10-year notes bounced back from near-record lows in almost a month after media reports suggested ECB President Mario Draghi pushed his strongest case yet for the central bank’s intervention in the sovereign bond market to bring down Spanish and Italian borrowing costs.
Draghi, appearing before a committee of the European Parliament, said the bank has lost control over borrowing costs and purchasing short-term government bonds will involve very little monetary financing.
Yield on 10-year Treasury notes climbed two basis points to 1.57 percent while yield on the benchmark 30-year Treasury bonds rose one basis point to 2.68 percent. Yield on 10-year notes had slipped to 1.54 percent earlier after the Institute for Supply Management’s US factory index showed manufacturing shrank for the third straight month in August.
Meanwhile, resource firms and drug makers led the decline in European stocks after weak US manufacturing data hit the wires. To complicate matters further, ratings agency Moody’s warned the European Union of downgrade if it failed to act swiftly to counter the crisis.
Spain’s IBEX 35 stock index rallied more than 0.7 percent after media reports suggested Mario Draghi has argued that ECB’s plan to buy boDJIA,SPX,nds maturing in three or fewer years do not violate the current EU rules while testifying before the European Parliament in Brussels Monday.
The German DAX 30 Index slumped 1.2 percent after index heavyweights Deutsche Bank and Lufthansa slid 2.3 percent and 1.3 percent respectively. French CAC 40 index posted its worst performance in a month, sinking 1.6 percent on the day.
Led by miners, UK’s FTSE 100 index crashed 1.5 percent as weak Chinese manufacturing data fueled fears of a slump in the resources industry.
In the ETF space, precious metals advanced after gold and silver prices hit a five-month high on speculations over an imminent European Central Bank intervention. The iShares Silver Trust (SLV) added 1.85 percent while the Global X Silver Miners ETF (SIL) rose 1.82 percent. Gains for gold funds were muted with the State Street SPDR Gold Trust (GLD) adding only 0.16 percent on the day.
The State Street SPDR S&P Pharmaceuticals ETF (XPH) surged 2.84 percent after the US govt. allowed Questcor Pharmaceuticals to pay lower rebates for its drug Acthar to state Medicaid programs. Questcor accounts for 4.77 percent of XPH and is the fund’s third largest holding.
All data above confirm again what I have been saying for months, that a global slowdown is underway, which can’t be stopped in my opinion. This is nothing new, yet markets are only focused on the actions of the central banks to see if they have one more rabbit in the hat to justify the current bullish trend. Sooner or later, this debt game will have to come to an end; the timing of it is just the unknown.
Disclosure: No holdings