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Stocks Tumble, Bonds Rock to Start Fourth Quarter


Today's financial recap and tomorrow's financial outlook.

US risk assets were hit hard again today, but the selling was ultimately very orderly.

A number of catalysts were cited for the weakness including the $6 billion asset management firm Relation Investors shutting its doors, pro-democracy protests in Hong Kong intensifying, Russia preparing for further economic sanctions, Blackrock stating that the odds of the ECB expanding its QE program were low, and poor economic data in the US. The bottom line is that following an average ADP private payrolls report, many investors had to pare back their forecasts for persistent 3% real GDP growth over the next 30 months, and this was reflected in today's price action.

The selling started in the opening moments and intensified after the September ISM manufacturing index was released at 10:00 am ET. The report showed that activity expanded at a slower pace in the month - down to 56.6 from 59.0 in August - and was well below the 58.5 expected. The new orders, exports, and imports component showed the largest decline from the prior month. The ADP private payrolls report for September showed net job growth of 213K versus the 205K expected, and the prior month was only revised down to 202K from 204K. Many market participants had expected that a strong jobs report would balance out the poor nonfarm payrolls report from last month. The unwinding of this view was most visible in short-term Treasuries today, with the 3-year yield falling by seven basis points.

The S&P 500 (SPX) closed down 1.32% although the small cap Russell 2000 (RUT) actually outperformed on a risk-adjusted basis. Utilities stocks were the only sector of the SPX to close positive today, thanks to the sizable drop in interest rates. Materials and energy stocks were the worst performers in sympathy to the recent drop in commodity prices. However, it is worth nothing that most hard commodities closed positive today as the USDJPY FX cross completed it a daily key reversal - where the price makes a new 52-week high and closes below the prior day's low, usually a sign of trend exhaustion.

Global high-rated government bonds were among the strongest performing assets today as investors began to doubt that economic growth would continue to remain high. The 10-year yield fell by 10 basis points to 2.39%, which is approaching the year's low of 2.32% from earlier this month.

Tomorrow's Financial Outlook

Much of tomorrow in US markets will be used to prepare for Friday's payrolls report. The clear consensus is that the lofty expectations of jobs growth have been reduced. The only significant piece of economic data tomorrow is the weekly jobless claims report, scheduled for release in the morning. Claims are expected to trend back up to the 300K level they have oscillated around for the past seven months. Also to be released is the August factory orders report.

The main event will be the ECB rate decision, scheduled to be released at 7:45am ET followed by President Draghi's press conference at 8:30. Due to the ECB having effectively reached the lower bound, it is almost impossible for another rate cut to occur. However, due to weak core inflation readings earlier in the week, many strategists have called for an expanded scope to the central bank's asset-backed securities (ABS) purchase program, the details of which will be released tomorrow. The expectations are high for tomorrow's meeting. The most likely assets to be affected are the SPX, Treasuries, and the US dollar.

There are no major earnings reports.

Twitter: @Minyanville

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