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Tough day at the office

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by Peter Switzer

The negative news is flowing and howling like Hurricane Alex off the Gulf of Mexico, and traders have headed for the exit doors on Wall Street. And I have to say the sellers had some solid reasons to doubt the growth outlook for the US and global economies.

Apart from the usual concerns about Euro debt challenges and a slump in US consumer confidence, there are new worries about the strength of China's economy.

The latter is the more serious one as it was less expected, however this new market issue also has a big question mark over it.

The Dow finished down 268.22 points or 2.65 per cent to 9870.3.

The Nasdaq lost 85.47 points or 3.85 per cent to 2135.18.

While the S&P 500 gave up 33.33 points or 3.1 per cent to 1041.24.

Slow down coming?

To see another angle on what’s going on in the market right now, we see that the US bond market has sent yields on bonds down to very low levels and this suggests that many think a serious slowdown is on the horizon. It also suggests deflation is a distinct possibility.

This is a direct result of all of this talk about deficit reduction and austerity programs. It’s only talk, but it’s spooking the short-term traders who are dictating market direction. These bond yields in the US are at historically very low levels.

Confidence lower

Then along comes a bad consumer confidence reading, which did not help investor confidence. The reading on shopper confidence from the Conference Board fell 10 points to 52.9. This was well below expectations and it reflected jobs recovery concerns.

"Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence," said Lynn Franco, director of the Conference Board Consumer Research Centre.

The low on this index was 25.3 in February 2009 and so we are a long way from there but the Yanks need to see some job-creation improvement and that makes the jobs report on Friday a very big deal.

Euro-worries

European concerns are all speculative and relate to the fact that banks on the continent have to repay 442 billion euros in emergency loans to the European Central Bank on Thursday. That could be good or bad news but considering where market sentiment is, the former holds sway.

Revised numbers

But the big new and bad news was China.

The Conference Board reported its leading indicators for China at 0.3 per cent in April, but this was a long way from the 1.7-per cent rise reported on 15 June. That’s a big mistake and it coincides with the big fall in the Baltic Dry Index which I have pointed to lately which could be telling us that China is slowing more quickly than expected.

Chinese officials say this blip won’t affect economic forecasts but until that’s proved, we’re in a selling situation.

On the remote good news front the S&P/Case-Shiller home-price index went up 0.4 per cent in April and beat the 0.1 per cent fall that was expected.

This was a tough day at the Wall Street office and unless the Chinese can explain away this blip today, you have to expect another tough day in our ‘office’ at the Australian Stock Exchange.

For advice you can trust, contact Switzer Financial Services.

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Published on: Wednesday, June 30, 2010