Stocks resume their fall despite good PMI reports

Tuesday was a day of mostly positive purchasing managers’ indexes from around the globe but the good news wasn’t enough to prevent U.S. stocks from resuming last week’s downtrend.

The S&P 500 dropped an even 1% while the Dow fell 0.8% and NASDAQ lost 0.7%. The selloff was once again widespread, sparing few sectors, with all 10 S&P sectors ending in the red, led by a 2.1% drop in energy stocks. Just two of the Dow 30 gained ground while one stock closed unchanged. Declining issues led gainers by a 7-to-3 margin on the New York Stock Exchange and by about 3-to-2 on NASDAQ. Treasury bond prices, which had been lower earlier in the session on the positive economic news, ended about unchanged on concern that Russia might be preparing to invade Ukraine, as a Polish official warned. The yield on the 10-year Treasury note finished at 2.49% after rising as high as 2.52%. Commodities prices remained weak, led by oil, where WTI futures closed below $98 a barrel.

After the close, the markets received some potentially negative news for stocks. The Federal Reserve and the Federal Deposit Insurance Corp. said the so-called “living wills” submitted by the 11 biggest U.S. big banks to show that their failure would not cause a wider economic crisis are “not credible.” The banks now have until July 1, 2015, to file “significantly improved plans or face consequences such as higher capital requirements, borrowing limits, or potentially an order to restructure,” according to the Wall Street Journal. Separately, 21st Century Fox said it was withdrawing its takeover bid for Time Warner, sending TWX shares down more than 10% in after-hours trading.

U. S. economic reports came in much better than expected. The Institute for Supply Management’s non-manufacturing index for July jumped nearly three points to 58.7, its highest level since December 2005, up from June’s 56.0. The Street had been looking for a more modest increase to 56.5; the most optimistic forecast called for a reading of 57.5. New orders jumped 3.7 points to 64.9. The index for the manufacturing sector, released last Friday, hit a three-year high of 57.1, up nearly two points from the previous month. Separately, factory orders for June rose 1.1%, nearly double the 0.6% consensus forecast and up sharply from May’s 0.6% decline.

European stocks were mostly higher but widely mixed among the major indexes amid economic reports that were mostly positive. The Stoxx Europe 600 gained 0.3% as the main German and French indexes rose 0.4% each, while Spanish (-1.4%) and Italian (-1.6%) stocks were sharply lower. Markit Economics’ composite output index for the euro zone for July rose a full point to 53.8, a three-month high and the 13th straight month it’s been in positive territory. The composite output index for Germany rose nearly two points to 55.7 while the index for the services sector rose more than two points to 56.7, a more than three-year high. Sovereign bond prices were lower on the news, sending yields on Spanish and Italian 10-year bonds up five basis points each and comparable German bunds up three bps.

But a disappointing report on China’s economy helped send stock prices mostly lower in Asia. The Asia Dow fell 0.8% as Japan’s Nikkei 225 slid an even 1%. Elsewhere, though, markets were mixed, with Hong Kong’s Hang Seng index up 0.2% and the Shanghai composite down by that much. Likewise, India’s Sensex rose 0.7% while Korea’s KOSPI index fell by that much. HSBC’s China composite PMI for July fell to 51.6 from 52.4 the previous month. While manufacturing held steady, the PMI for the services sector dropped more than three points to 50 – the dividing line between expansion and contraction – and the lowest figure since the index began in November 2005. The bank blamed the drop on the ongoing property slowdown in many Chinese cities.

Reports/dates/facts/links worth paying attention to over the next week:

  1. August 7: Weekly unemployment claims; consumer credit (June).
  2. The Atlanta Fed’s new GDP forecasting model: GDPNow

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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