The dollar pulls back in the wake of the negative manufacturing PMI

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Commenting on today’s trading with a focus on manufacturing PMI numbers, Gorilla Trades strategist Ken Berman said:

Today’s broad sell-off was once again led by small-caps, and their persistent weakness continues to warrant caution from a short-term perspective.  It seems that risk of a global recession, the political uncertainty in the U.S., and today’s scary Asian headlines were too much to handle for bulls, and the risk-off shift was confirmed by the Volatility Index (VIX), which closed at its highest level in a month.

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Manufacturing PMI numbers are terrible

The major indices finished significantly lower today, as the combination of the escalating tensions in Hong Kong and a much worse-than-expected manufacturing survey triggered another global pullback in risk assets. The Dow was down 344, or 1.3%, to 26,573, the Nasdaq lost 91, or 1.1%, to 7,909, while the S&P 500 fell by 36, or 1.2%, to 2,940. Decliners outnumbered advancing issues by a more than 4-to-1 ratio on the NYSE, where volume slightly above average.

The fourth quarter kicked off with an ugly day for stocks, and the major indices all finished near their intraday lows, with the S&P 500 and the Dow hitting their lowest levels since early-September. Industrials were hit the hardest due to the worst ISM manufacturing PMI in over a decade, while financial and materials also suffered as Treasury yields and the price of oil declined. Utilities and consumer goods remained relatively strong all day, so it seems that the trends that dominated trading in August are back and investors are turning towards safe-havens again.

Today was a very important day in China, as the country celebrated the 70th anniversary of the Republic, and the protests in Hong Kong continued in earnest on the national holiday. A young protester was shot during the march, and analysts now fear that the situation could get out of control in the key economic center. The trade negotiations between the U.S. and China are set to resume next week in Washington, and following a week of mixed reports regarding the talks, the escalation could have a major influence on their outcome.

While in the first half of September, global economic numbers improved slightly, recession fears returned in earnest since then. The odds of another rate cut by the Fed are on the rise again, and the declining Treasury yields reversed some of the encouraging trends that started last month. We will have the ISM non-manufacturing PMI and the government jobs report coming out in the second half of the week, and as Fed Chair Powell is scheduled to give a speech Friday afternoon, Treasuries are likely in for another very active period.

The ADP payrolls number will be in focus with regards to economic numbers tomorrow, and in light of the weakness in manufacturing, the state of the labor market is even more important. Analysts expect payrolls to increase by 140,000 following last month’s reading of 195,000, and Friday’s official non-farm payrolls number is forecast to rise by the same amount. The weekly crude oil inventory data will also be out tomorrow, and since the price of the crucial commodity is down by almost 20% compared to its peak hit following the Saudi-attack, energy bulls are hoping for a positive surprise to stop the bleeding.

Technical Corner:  The short-term outlook deteriorated somewhat due to today’s sell-off, but the bullish long-term trend remains safe according to the most reliable trend indicators. The major indices are still all well above their still rising 200-day moving averages of 7,704 for the Nasdaq, 2,836 for the S&P 500, and 25,830 for the Dow. That said, today, the indices all dipped below their 50-day moving averages of 2,948 for the S&P 500, 8,032 for the Nasdaq, and 26,562 for the Dow, and only the industrial average closed above its short-term indicator. 

The dollar pulled back today in the wake of the negative manufacturing PMI, but the dip doesn’t make the currency’s recent run-up less impressive. The Dollar Index (DXY) is trading near its multi-year low, but compared to a wider range of currencies, the dollar actually just hit an all-time high. From a technical standpoint, the currency is in a roaring bull market, although currently, some of the short-term indicators point to a coming correction. Despite that, the fundamentals behind the move are still in place, and the bull market could continue in the foreseeable future. Stay tuned!

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