Submitted by Mark Hanna
You may not have noticed but yesterday was the 8th straight Monday down for U.S. markets. This is a relatively rare occurrence with the last coming in 2002 – and these 2 episodes the only ones since 1985. While a random factoid, it is interesting as the market has generally responded decently on Mondays due to merger announcements and the like over the years. According to Bespoke Investment the record for the DJIA is 14 weeks, back in 1963. Now that everyone is aware of it it will be interesting to see what next Monday brings.
Turning to economic data overnight, Chinese PMI came in at a 5 month high. While taken with a grain of salt that would be a small but encouraging sign if it can continue, considering how important the European market is for China. The number is still sub 50, indicating contraction but at 49.5 is within spitting distance of getting to expansion.
- HSBC's Flash China manufacturing purchasing managers index (PMI) rose to 49.5 in July from 48.2 in June, rising close to the 50 level that divides expansion from contraction. The increase was driven by a jump in the output sub-index to 51.2 – the best showing since October 2011.
- The new orders sub-index recovered to a three-month high while new export orders gave their best showing since May, although both remained below 50. An employment sub-index fell to its lowest level since March 2009.
Yesterday, the earning report of McDonald's indicated signs of strain from Japan to Europe, and the dollar strength continues to show it's negative impact on these multinationals. Today we have lowered guidance by UPS.
- For the fiscal year, UPS cut its earnings per share guidance to $4.50 to $4.70 from its prior estimate of $4.75 to $5, and down sharply from Street estimates of $4.83. The company cited increasing uncertainty in the U.S. and weakness in China and Europe shipments.
None of this earnings data is a "surprise" per se, but the question is how much is already anticipated and priced in. So far it's been quite a dour quarter with revenue misses galore but earning beats (off lowered expectations) not much different than normal. Apple will report dominate and dominate the news flow for the next 24 hours.
Over in Europe, the mess in Spain continues as mid 7% rates on the 10 year bond persist. Interestingly, the 5 year rate crossed over the 10 year today – not a great sign. That said, while all European markets were hit hard yesterday, today the damage is mostly focused on Spain itself. Expectations of course remain for intervention each time we reach certain levels but I'm not sure what policy options remain that are politically viable at this moment – so the calls for the ECB to intervene are rising.
As for the U.S. after a traumatic open to the day, indexes regained some composure to bounce somewhat. 1340 and 1370 remain key levels on the S&P 500 as they have for many, many months, and yesterday's bounce essentially came at 1340 – a few points below. The dollar and U.S. bond markets remain in bull mode, which are headwinds to a sustained move in the equity market.
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