Sounding The Alarm?

Daily State of the Markets 
Wednesday Morning – June 30, 2010  

The change to China’s LEI caused investors to hit the sell button early and often Tuesday. It was as if a siren had gone off at the corner of Broad and Wall alerting investors to the prospects for a global economic slowdown.

To be fair, there were a few other issues facing the markets yesterday. However, it was the Conference Board’s announcement that there had been a “calculation error” in their first-ever posting of the Leading Economic Indicators for China that seemed to get the bears riled up. In short, given that China is viewed as the world’s best economy right now – at least in terms of GDP growth – and that investors have been more than a little nervous about China’s plans to slow things down, the fact that the April LEI was reduced from +1.7% to just +0.3% was a problem. Although the data comes from a U.S. company, the report served as an alarm to macro-oriented investors that perhaps China’s growth was slowing more than anyone thought.

While the news on China’s economy dominated the action in the early going, it was another report from The Conference Board – this one on Consumer Confidence here in the U.S. – that caused the decline to pick up steam. The report showed that confidence among U.S. consumers took a dive in June as the index came in 15.6% below May’s reading and at 52.9, the index was well below the consensus for a reading of 62.5.

There was also a fair amount of worry yesterday about the prospects for European banks to repay about 500 billion euros to the ECB this week as the ECB is letting a special funding facility expire. The concern is that the repayments which are scheduled for Thursday, might be an indication of just how weak the European banks are. And with Spain being especially vocal against the ECB’s decision to let the facility expire, well, it doesn’t take much of an imagination to figure out why.

And finally, there is the worry that Friday’s Employment Report might be less than robust. Given the weaker-than-expected economic indications that we’ve seen lately, analysts are quickly becoming less than optimistic about the prospects for job growth in the U.S. In fact, the consensus for Friday’s report right now is a net job loss of about 100K. However, this number has been tough to call lately, so stay tuned.

On a chart basis, Tuesday’s action was, well… not good – not good at all. Support levels broke down on a closing basis, a new low was put in on an intraday basis, and the weekly chart now shows a breakdown on a nifty head-and-shoulders formation. And while the bulls (along with a little help from the HFT gang) could certainly turn this thing around on some good news, the technicians are less than optimistic about the future at the moment. However, I would like to point out that the chart followers were equally as downbeat about the chart action almost a year ago when a purported head-and-shoulders top formation had been confirmed. And if you will recall, that didn’t turn out so well for the bears.

We’re of the mind that this remains a news-driven environment and unless we get a meaningful breakdown from here, we’re going to stick with our view that we’ve got a trading range of sorts on our hands.

Turning to this morning… We’ve got some good news and some bad news. The good news is the demand in Europe for the ECB’s 3-month lending facility was low. This bodes well for tomorrow’s repayment of around 500 billion euros and is giving the European markets a boost.

On the economic front, the news wasn’t so hot. Although ADP reported that the private sector job market expanded for the fifth straight month in June, the report shows that private sector jobs grew by just 13,000 jobs last month, which was well below the consensus expectations for a gain of about 60,000. The May report was revised slightly higher to show a total growth in jobs of 57,000, which is up from the original report of 55,000.

Finally, don’t forget to check the happiness box today…

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: -1.05%
  • Shanghai: -1.18%
  • Hong Kong: -0.59%
  • Japan: -1.96%
  • France: -0.15%
  • Germany: +0.04%
  • London: +0.11%

   

• Crude Oil Futures: + $0.03 to $75.97
• Gold: – $4.40 to $1238.00
• Dollar: Lower against Yen and Euro, higher vs. Pound
• 10-Year Bond Yield: Currently trading lower at 2.97%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -1
  • Dow Jones Industrial Average: -8
  • NASDAQ Composite: +2  

Wall Street Research Summary

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