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Smorgasbord Of Negative Catalysts Jostle Global Markets


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

US stock markets weakened early in the trading day and the selling never stopped. The early weakness was attributed to a poor earnings report from Banco Espirito Santo (BES), a Portuguese bank who's holding group filed for bankruptcy earlier this month. Argentina reached a deadline to repay its bondholders that were still holding out from its default 13 years ago. Lastly, inflation in the eurozone fell to +0.4% from a year ago, which was received negatively. Two major ratings agencies - S&P and Fitch - lowered Argentina's credit profile to selective default during the day. News reports indicated that a group of international banks had negotiated a deal to purchase the holdouts bonds, which would avoid a potential default.

The regional Chicago manufacturing index showed an enormous drop in July from the previous month. The index, which is highly sensitive to changes in auto manufacturing, fell to 52.6 from 62.6. Economists had expected 63.0. Although equities had sold off for much of the day, this did not help matters. The other economic report today that drew the most attention was the employment cost index for the second quarter. The index showed a surprising 0.7% gain (versus the 0.5% expected)  that included the fast growth in wages from the recovery. However, the cost for health care and other benefits showed the largest increase in more than a decade, and was a major reason behind the jump in the headline figuer.

High yield bonds came under tremendous pressure today. The spread between cash bonds and Treasuries widened by 13bps today, on a day when interest rates were mostly flat. Reports of redemptions in the fund space were also rampant. This was also a major root cause for the weakness in equities today.

The S&P 500 (SPX) fell by exactly 2% today, a three standard deviation move. No sector was spared in today's session as all 10 dropped by more than 1%. The last fact is surprising because even though Treasuries remained relatively flat today, the interest rate sensitive telecom, utilities, and real-estate sectors all suffered equally. Down-volume accounted for 86% of total volume on the NYSE today, just short of the iconic 90% down day. Trading volume was the third highest of the year, excluding days when there were multiple options expirations. Tech and small cap stocks were also weak.

Tomorrow's Financial Outlook

The most important event tomorrow for global markets is the July nonfarm payrolls report. If wage growth increases at a faster rate it will cause investors to begin positioning for higher inflation, a higher dollar, and a more hawkish Fed. The economist estimate is for a net gain of 230K, down from 288K last month. Earlier this week, the ADP private payrolls report showed a payrolls gain of 218K for July, below the 230K expected. Other labor surveys have indicated that a payrolls report that is roughly consistent with the 6-month average of 230K is likely. Also scheduled to be reported tomorrow is June's personal consumption & income, the ISM manufacturing index for July, and auto sales.

Around the rest of the world, the major reports scheduled are all manufacturing PMI's. Overnight, the official Chinese gauge will be reported as well as the final index from HSBC. Earlier this month, the HSBC index continued to show strong growth, rising to 52.0 from 50.7 in the prior month. The eurozone, UK, and Canada will all release their respective manufacturing PMI's.

Only six major US companies are scheduled to report earnings tomorrow morning before the open. Those are Procter & Gamble (PG), Weyerhauser (WY), Burger King (BKW) Hilton Worldwide (HLT), WisdomTree (WETF), and Chevron (CVX).

Twitter: @Minyanville

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No positions in stocks mentioned.

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