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


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:
  • Japan's Nikkei (INDEXNIKKE:.NI225), the hottest stock market in the world, fell an impressive 7.32%, wiping out a chunk of the gains from a weaker yen and government stimulus.
  • France's CAC (INDEXEURO:PX1) dropped 2.36%.
  • The German DAX (INDEXDB:DAX) fell 2.50%.
  • The UK's FTSE (INDEXFTSE:UKX) is down 1.73%.
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
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