Thursday, January 23, 2014

Are The Wheels Coming Off China's Growth Engine?

Our markets had been holding up surprisingly well lately, until this morning's data from China seems to have rattled confidence for the time being.  Of course, it's still early in the day so its possible that we see some of this selling pressure abate by the close and for the market to recoup some of these losses.  So the close today will be telling.

China's HSBC Manuf. PMI fell into the contraction zone by falling to 49.6 from 50.5 previously.  It is the first time in 6 months that it has fallen below the 50 level.  The HSBC chief economist described it as softening growth, although I'm sure China will try to spin it as temporary.  Emerging markets are selling off in response.

Europe's markets are faring better after the Eurozone manuf PMI rose to 53.9 from 52.7.  And the services PMI also rose to 51.9 from 51.0.  So it appears that Europe continues to be on the mend from its recent recession.

Earnings reports continue to roll in and again today we are seeing more stocks falling in reactions to earnings than rising.

Stocks rising on earnings: MCD, NFLX, EBAY, FFIV, UNP

Stocks falling on earnings: UAL, SNDK, WDC, JEC, PCP, LMT, NOK, BGG, LUV, JBHT

Commodities are higher with oil prices now topping $97.65 and gold prices firmer today to $1260.

The 10-year yield is sliding further to 2.80%.  And the volatility index is spiking to the 14 level.  We noted recently that whenever the VIX gets down near the 12 level we usually see a bounce from there.  This scenario held true again this time around.

Trading comment: We had been thinking stocks would make another breakout to new highs.  Its possible that this weak China data could put that on hold for a bit, but the economic picture in the US is still improving and that should cause investors to shrug off the China news in the near-future and put the focus back on US stocks.

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