Mid-Day Recap: Global Stocks Lose Balance

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It's been a brutal day in equity markets so far, not just in the US but globally. China’s Shanghai stock market plunged 5.8%, its worst daily loss since November, sending investors into a global sell-off frenzy. Japan's Nikkei index fell 3.1%, Britain's FTSE 100 slid 1.7%, Germany's DAX closed 2% lower, and France's CAC-40 fell 2.3%. By the time the US markets opened, equity futures had already taken a beating in pre-session trading.

Since the open, markets have moved slightly higher but the mid-day results are still awful. As of 1:30, the Nasdaq is the worst of the bunch, trading down 2.51% to 1,935. The benchmark S&P 500 is 2.16% lower at 982, and the Dow is little better with a 1.70% dip to 9,158.

 

“Risk is taking a major step back to start the week,” said Sal Guatieri, economist at BMO Capital Markets, during the pre-session sell-off. “There is no clear catalyst, though news on Friday that five more U.S. banks filed for bankruptcy, bringing the total in the past two years to above 100, isn’t helping investor sentiment. News that Japan’s economy grew, as expected, for the first time in five quarters provided little support.”

MND analyst Adam Quinones reports that the market is beginning to focus more on growth fundamentals citing that investors are worried consumers aren’t ready to spend.  The consequence being the jobs market as corporate giants will be reluctant to add expenses to their trimmed down balance sheets. That theory gained some traction as Q2 earnings from Lowe’s, the home-improvement retailer, showed a 19% drop on weaker-than-anticipated sales.

 

Trading has been heavy, as seen in the volatility index known as the VIX, which jumped 17% in early trading to a one-month high. Moreover, about 2,700 stocks on the New York Stock Exchange fell in the morning, with only 230 heading upwards, according to the Associated Press.

US economic data was mixed this morning, a blend of positives and negatives.

The Empire State Manufacturing Survey indicated that conditions for New York manufacturers are at their most optimistic level since November 2007. The headline Business Conditions index expanded by 13 points to a +12 reading in August ― its highest reading in two years ―  with improvement in New Orders, Shipments, and Employment.

“This report corroborates the improvement in the industrial production figures for July, which were reported on Friday; and it suggests that the national production figures will rise further in August,” said chief US economist Joseph LaVorgna from Deutsche Bank. 

The TIC flows report, which tracks the volume of investments flowing in and out of the country, was mixed. Appetite for Treasuries remained healthy despite fewer holdings in China, allowing for a huge inflow of financial assets as the second quarter concluded, but total net flows showed a worse than expected outflow.

“Net long-term capital flows to the United States accelerated sharply in June, with net foreign purchases of U.S. long-term securities soaring from an inflow of only $7.9 billion in May to an inflow of $123.6 billion in June,” said Brian Bethune from IHS Global Insight. “The surge was primarily driven by a sharp increase in overseas demand for U.S. treasury securities by private investors.” 

However, monthly net TIC flows, a more comprehensive measure that includes non-market flows, short-term securities, and changes in banks' dollar holdings, reported  a net foreign capital outflow of $31.2 billion in the month ― its third consecutive outflow ― subtracting from an outflow of $65.7 billion in May. 

TD strategist Charmaine Buskas called that “worrisome.” She commented: “Overall, there is some concern that foreign appetite for U.S. Treasuries might sour, especially if the global recovery gets traction and risk appetite improves such that investors no longer need the safety of Treasuries.”

In what may have been an effort to improve sentiment, the Federal Reserve and the Treasury released a joint statement announcing they would extend emergency credit lines ― specifically, the Term Asset-Backed Securities Loan Facility (TALF) ― by six months.

“Conditions in financial markets have improved considerably in recent months,” the statement read. “Nonetheless, the markets for asset-backed securities (ABS) backed by consumer and business loans and for commercial mortgage-backed securities (CMBS) are still impaired and seem likely to remain so for some time.”

The two agencies said extending the TALF loans would “promote the flow of credit to businesses and households” and “facilitate the financing of commercial properties.”