Pre-Market Primer: Fed Triggers a Stock Bloodbath; Initial Claims Fall

By Vincent Trivett  MAY 23, 2013 8:50 AM

Adding to the bloodbath this morning was a disappointing report on manufacturing in China and Europe.

 


Stocks fell off a cliff since the Fed confirmed fears that it will taper off quantitative easing soon.

Federal Reserve Chairman Ben Bernanke told Congress that the Fed could begin to scale back its $85 billion monthly diet of asset purchases at one of the "next few meetings" of the Federal Open Markets Committee as long as economic indicators continue to improve. At the last FOMC meeting, "a number" of members said that this could happen as early as June, but there is still no consensus over when to start

This is exactly what fund managers and investors feared since US and global equities took off early this year: that the whole rally is dependent on the Fed's stimulus. It is likely that markets could dive even further if labor market indicators continue to improve, as it will be interpreted as a green light for the Fed to hit the brakes.

The move affected stock markets all over the world: Adding to the bloodbath this morning was a disappointing report on manufacturing in China and Europe. The flash manufacturing PMI estimate for China's manufacturing sector fell to 49.6 this month from 50.4 in April. This is below the 50 threshold that separates contraction from expansion. In Europe, manufacturing is still in decline, but the pace they are falling at is slowing down. As a whole, the euro currency union's flash PMI rose to 47.7 from 46.9. Germany rose to 49, up from 48.1 last month and France gained one point to 45.4.

One bright spot was intial jobless claims, which fell to 340,000 last week from a 363,000 spike in the week before. Economists expected a fall to 345,000. The markets might react negatively, however, since the improving economy bolsters the case for ending quantitative easing.

Following yesterday's losses, Dow (INDEXDJX:.DJI) futures are down 0.77% at 15,202 before the opening bell. S&P 500 (INDEXSP:.INX) futures sank 0.93% to 1,640.20 and Nasdaq (INDEXNASDAQ:.IXIC) futures fell 0.93% to 2,973.00. Gold futures are up 1.47% at $1,387.50 per ounce.

Later to follow this morning is the US flash manufacturing PMI, which is expected to fall 0.9 points to 51.2, as the sector's growth slowed in May. Also on the economic calendar is the FHFA home price index for March, which is expected to show a monthly rise of 0.8%. A separate report is likely to show that new home sales sped up in April to a seasonally adjusted annualized rate of 425,000 from 417,000 in March.

Yesterday, Hewlett-Packard (NYSE:HPQ) shares rose 12.2% after beating expectations and reporting an improved outlook. The tech company earned $0.87 per share, beating estimates by a nickel, and raised guidance for the full year to $3.50 to $3.60 per share.

Sears (NASDAQ:SHLD) shares are up 1% in the premarket today ahead of their earnings announcement this afternoon. The retailer is expected to report a loss of $0.60 on $8.37 billion in revenue. Competitors such as Wal-Mart (NYSE:WMT) have suffered recently due to the increase in the payroll tax that subtracted from consumers' budgets.

Twitter: @vincent_trivett
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.