The global stock markets got rocked on Friday.
The 279-point sell-off in the Dow dropped the index’s 2015 gain to 0%.
The economic calendar is light this week. But earnings season kicks into high gear with big companies including IBM, Morgan Stanley, Halliburton, Facebook, Coca-Cola, Google, and Microsoft announcing their quarterly financial results.
Here’s your Monday Scouting Report:
What caused the sell-off? Friday’s global market sell-off began long before the US markets actually opened. JonesTrading’s Dave Lutz identified three destabilizing headlines: reports that some banks were being forced to dump Greek bonds, the tightening of trading restrictions in China, and a massive outage in Bloomberg terminals.
The consumer price index report suggested inflation was firming and the University of Michigan consumer sentiment index suggested confidence was picking up. According to Intercontinental Exchange’s Charlie Brown, traders said this was hawkish for monetary policy, “fanning the ‘rate increase earlier’ flames again.”
No one seemed to be able to pinpoint the cause of Friday’s plunge. Rather, it seemed to be a confluence of things market watchers had been warning about. Add to everything that valuations are well above average and the market continues to be near an all-time high, and the volatility becomes less surprising.
- Existing Home Sales (Wed): Economists estimate the pace of sales climbed 3.1% in March to an annualized rate of 5.03 million units. From Bank of America Merrill Lynch: “This will add to the 1.2% gain in February to partly offset the sharp drop of 4.9% in January. Smoothing through, however, sales will still likely be down for Q1. The trajectory looks more promising given the notable improvement in pending home sales, which track signed contracts. Moreover, mortgage purchase applications have been heading modestly higher, likely reflecting the low rate environment. Inventory of existing homes have remained low, leaving supply to fall to only 4.6 months. We expect this to start to turn higher with the spring selling season.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims slipped to 290,000 from 294,000 a week ago. “Claims have been below 300k for six consecutive weeks and continue to point to solid improvement in labour market performance,” Nomura economists said.
- Markit US Manufacturing PMI (Thurs): Economists estimate this manufacturing index slipped to 55.6 in April from 55.7 in March. From UBS’s Sam Coffin: “Despite weakening in export orders, the Markit PMI has maintained momentum in early 2015. We forecast little change in April. Two regional surveys — the Empire State and Philadelphia Fed measures — have suggested no.”
- New Home Sales (Thurs): Economists estimate the pace of sales fell 5.4% in March to an annualized rate of 510,000 units. From Bank of America Merrill Lynch: “Single family starts and permits have been sluggish, which indicate weaker demand for new construction homes.”
- Kansas City Fed Manufacturing Activity (Thurs): Economists estimate this regional activity index climbed to -2 in April from -4.0 in March.
- Durable Good Orders (Thurs): Economists estimate orders climbed 0.6% in March. Excluding transportation equipment, orders are estimated to have climbed by 0.3%. Nondefense capital goods orders excluding aircraft, or core capex, is estimated to have increased by 0.3%. From BNP Paribas: “While Boeing aircraft orders were firm during the month, manufacturing sentiment generally has been quite weak as of late, suggesting that ex- aircraft orders were likely soft.”
There’s no shortage of reasons to be nervous about the stock market. Among other things, Bank of America Merrill Lynch’s Savita Subramanian warns that the bullish benefits of easy monetary policy like quantitative easing (QE) are waning.
Here’s Subramanian: “Don’t bank on global QE to keep this going. We see signs of QE fatigue. Since 2010, each subsequent policy response has seen diminishing returns in risky stocks, so global easing may not be enough. In the US, the Fed is expected to tighten this year, and fiscal stimulus has been replaced by a culture of fiscal austerity. Low quality valuations should compress further in our view and eventually trade at a discount to high quality stocks, which we expect to re-rate considerably. Cash-rich, self-funded companies should be relative winners as liquidity conditions normalize.”
For more insight about the middle market, visit mid-marketpulse.com.
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