The Market Today

Intensifying Weakness in Europe Stirs Fears of Global Slowing


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Existing Home Sales Expected to Bounce Back in February to Still-Subdued Sales Pace: All of Friday’s economic reports are scheduled for after U.S. markets open for trading. At 8:45 a.m. CT, Markit will release its preliminary PMI data for March. Economists expect offsetting shifts in manufacturing (+0.5 points) and services (-0.5 points) which could cause the weighted composite PMI to edge lower from February. Wholesale inventories and trade data will be released 15 minutes later but are likely to be overshadowed by February’s existing home sales report. Existing home sales are expected to rebound 3.2% from January’s 4.94MM unit sales pace, the weakest in 38 months. Finally, the Treasury will announce at 1 p.m. CT its monthly budget statement for February.

 

TRADING ACTIVITY

Yesterday – Stocks Recovered Nicely from a Post-Fed Sell-Off, Treasury Yields Inched Higher: Equities recovered nicely on Thursday after slipping Wednesday in the wake of the Fed’s March decision. The S&P 500 was immediately jolted higher after the Fed projected no rate increases this year, but gave up its gains as investors faced with the fact that the Fed’s decision was driven by a highly uncertain economic outlook. Financial companies within the index slumped Wednesday to lead broader losses as rates rallied in a margin-compressing fashion. Financials struggled again Thursday, dropping 0.3% on the day despite Treasury yields inching higher. After shedding 7.2 bps on Wednesday, the 2-year yield rose 1.2 bps Thursday. The 10-year yield rose 1.1 bps after posting an 8.6 bps decline the day before. Away from financials, the other 10 S&P 500 components rose in a delayed response to the Fed’s dovish decision with the tech sector out front. Tech companies jumped 2.5% after a strong earnings report from Micron lifted semiconductors and rippled through to other related-companies’ valuations. The S&P 500 ultimately settled up 1.1% at 2,855, its highest level since October 9 and just 2.6% from an new record high.

 

Overnight – Intensifying Weakness in Europe Stirs of Fears of Global Slowing: Global investors are shedding risk Friday after another round of disappointing economic data out of Europe reinforced concerns about a global slowdown. Asian equity markets traded mixed earlier in the day but the tone soured quickly around 3:30 a.m. CT after preliminary PMIs for France and Germany came up well short of estimates. France’s manufacturing PMI fell more than expected from 51.5 to 49.8 while the services PMI dropped unexpectedly to from 50.2 to 48.7. As a result, the composite PMI slipped from 50.4 to 48.7, signaling activity has slowed in three of the last four months. German data was equally as disappointing as the manufacturing PMI unexpectedly slumped nearly 3 points to 44.7, the lowest since 2012. Germany’s manufacturing PMI has now declined for eight consecutive months and in 14 of the last 15. The services PMI also slowed, pushing the composite PMI down to 51.5, the lowest in nearly six years. Those downside misses dragged the Eurozone manufacturing PMI down to 47.6, a second month of contraction and the weakest reading since 2013. The Stoxx Europe 600 erased a 0.3% gain immediately after the national releases and was earlier down 0.7%. Bonds in France and Germany led a rally across Europe that pushed the German 10-year yield (-5.0 bps to -0.01%) back into negative territory for the first time since October 2016. U.S. markets have responded to the disappointment with weaker equity futures and a stronger bid for Treasurys. The 2-year yield was down 4.0 bps to 2.37% while the 10-year yield had dropped 6.2 bps to 2.47%. Yields on Treasury notes between two and ten years were all trading within the Fed’s target range. Worth nothing, although it was subsequently swallowed up by the weaker European data, was the EU granting the UK a delay in the expiration of Article 50 past next Friday’s deadline. The date of the new deadline depends on if Parliament passes PM May’s Brexit plan next week in its third attempt. If the deal is successfully moved through the House of Commons, May 22 will be the exit date. If Parliament votes down the deal again, the UK government will have until April 12 to either decide to accept a no-deal Brexit or agree to a much longer extension to allow negotiators to go back to the drawing board. The British pound was up on the day.

 

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