Market Insights 1/3/2018

U.S. equities saw large declines, with late-yesterday’s revenue warning from Dow member Apple highlighting emerging market growth concerns, which was followed by a surprising drop in the ISM Manufacturing Index.

Treasury yields and the U.S. dollar were lower, while crude oil prices were higher and gold rose to its highest level since June.

The Markets…

The Dow Jones Industrial Average moved 660 points lower (2.8%) to 22,686

The S&P 500 Index decreased 62 points (2.5%) to 2,448

The Nasdaq Composite lost 202 points (3.0%) to 6,464

In moderately heavy volume, 958 million shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq

WTI crude oil traded $0.55 higher to $47.10 per barrel and wholesale gasoline was up $0.02 at $1.35 per gallon

The Bloomberg gold spot price rose $10.18 to $1,294.77 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—retreated 0.6% to 96.25

Manufacturing activity slows more than expected, ADP’s employment report tops forecasts

The Institute for Supply Management (ISM) Manufacturing Index for December fell to 54.1 from the unrevised 59.3 in November, versus the Bloomberg forecast calling for a decline to 57.5, with a reading above 50 denoting expansion. The index hit the lowest level since November 2016 and posted the largest point decline since 2008 as new orders dropped 11 points to 51.1, production fell 6.3 points to 54.3 and employment declined 2.2 points to 56.2. Inventories decreased 1.7 points to 51.2, order backlogs lost 6.4 points to 50.0, supplier deliveries fell 5.0 points to 57.5 and prices dropped 5.8 points to 54.9. However, new export orders ticked 0.6 points higher to 52.8. ISM said respondent comments reflected continued expanding business strength, but at much lower levels.

The ADP Employment Change Report showed private sector payrolls rose by 271,000 jobs in December, above forecasts of a 180,000 gain, while November’s increase of 179,000 jobs was revised to a 157,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of tomorrow’s broader December non-farm payroll report, expected to show job growth of 181,000 and that private sector employment rose by 185,000 and the unemployment rate is expected to remain unchanged at 3.7%.

Weekly initial jobless claims increased by 10,000 to 231,000, above the Bloomberg estimate of 220,000, with the prior week’s figure revised higher to 221,000. The four-week moving average dipped by 500 to 218,750, while continuing claims rose by 32,000 to 1,740,000, north of estimates of 1,690,000.

The MBA Mortgage Application Index fell 8.5%, following the prior week’s 1.4% decline. The drop came as a 10.6% fall in the Refinance Index combined with a 7.6% retreat for the Purchase Index. The average 30-year mortgage rate decreased 2 basis points to 4.84%.

Treasuries rallied, with the yield on the 2-year note falling 9 basis points (bps) to 2.38%, the yield on the 10-year note descending 6 bps to 2.56%, while the on the 30-year bond dropped 4 bps to 2.91%.

Tomorrow’s economic docket, in addition to the labor report, features a final read on the Markit U.S. Services PMI Index, forecasted to be flat at 53.4, followed by a joint interview with Fed Chairman Jerome Powell, with his predecessors Janet Yellen and Ben Bernanke.

Europe and Asia mostly lower on tech weakness

European equities finished mostly lower, with the technology sector falling decisively on the heels of late-yesterday’s revenue warning from Apple, which cited weakness in China to exacerbate global growth concerns, along with a softer-than-expected manufacturing report out of the U.S. In the wake of the disappointing U.S. manufacturing report, energy issues gave up early gains that followed yesterday’s sharp upside reversal in crude oil prices on signs that OPEC and its allies appear to be following through with production cuts. The euro rose versus the U.S. dollar, while the British pound was little changed. Bond yields in the region were mixed.

Stocks in Asia finished mostly lower, with the tech sector and global market sentiment getting pressured by Apple’s revenue warning late yesterday, due to weakness in Greater China, which added to this week’s data showing China’s manufacturing output contracted in December.

However, volume was lighter than usual as markets in Japan remained closed for a holiday, though the yen rallied noticeably versus the U.S. dollar amid the uneasy global sentiment. South Korean equities declined and Indian stocks fell.

Hong Kong shares gave up early gains and finished lower and mainland Chinese equities finished little changed amid speculation that state-backed funds were buying shares in Chinese brokerages to try to stabilize the markets, per Bloomberg. Australian stocks managed to rally, with the energy sector leading the way following yesterday’s sharp upside reversal in crude oil prices after data showed Saudi Arabia cut crude oil exports, suggesting that OPEC and its allies could be following through on production cuts.