Canada’s main stock market dropped yesterday as slowing growth in China, worry over looming euro-zone bank repayments, and a drop in U.S. consumer confidence unnerved investors around the world. China’s exports face “strong headwinds” in the 2nd half of the year from policy tightening measures and the European debt crisis which reduce the prospects of a rebound in the stock market. All 10 sectors of the index declined in value as weakness in the energy, financials and materials sectors led declines. The index had the biggest 1-day drop since the “flash crash” of May 6th of this year.
Stock market declines were largely driven by a revision to the Conference Board’s leading economic index for China to a 0.3% gain in April instead of the 1.7% rise the group had reported earlier. The Toronto Stock Exchange’s S&P/TSX composite index closed 343.17 points, or 2.96%, lower at 11,263.83. The day’s low was 11,244.03, the TSX’s weakest level since May 21st. Also driving the index down was data that showed U.S. consumer confidence fell steeply in June as worries about the employment market grew.
The market was already jittery about scheduled bank repayments worth 442 billion Euros to the European Central Bank on Thursday that could leave a liquidity shortfall in the financial system of more than 100 billion Euros.
Investors want to see jobs being created in the private sector in the U.S.; China needs to report some sustainable growth and European countries need to refinance their debt.
In the United States investors fled the stock market and the S&P 500 tumbled to its lowest level in 8 months in a sell-off triggered by a wave of increasing alarm over the global economic outlook. All but 1 stock in the S&P 500 ended lower as escalating doubts about the stability of Europe’s banks roiled markets once again. Zimmer rose 0.1% for the only gain in the S&P 500. Since 1996, there have only been 3 days that only 1 stock within the S&P 500 advanced on the day, according to data compiled by Bloomberg.
The S&P 500 had tumbled below its 2010 intraday low of 1,040.78 during the day, which analysts said could ignite further declines. The index closed at its lowest level since October 30th, breaking its closing low for the year at 1,050.47 which is another bearish signal for stock markets.
The Dow Jones industrial average lost 268.22 points, or 2.65%, to 9,870.30, the Standard & Poor’s 500 Index fell 33.33 points, or 3.10%, to 1,041.24 and the Nasdaq Composite Index dropped 85.47 points, or 3.85%, to 2,135.18. The S&P 500 has tumbled 14% from this year’s high on April 23rd, economically sensitive sectors such as materials, industrials and financials were among the hardest hit and led decliners.
The Chicago Board of Options Exchange (CBOE) volatility index which is known as Wall Street’s fear gauge, jumped 22% to a day high of 35.39, its highest level since early June, in a sign more volatility could be coming to fruition.
U.S. consumer confidence dropped sharply in June, after rising for three months, on worries about the labor market, according to a report from the Conference Board. The news heightened fears of an economic slowdown after a recent spate of weak data from the housing and job markets. The group’s index of consumer attitudes fell to 52.9 in June from a downwardly revised 62.7 in May. The June figure was sharply below the median of forecasts from analysts polled by Reuters. Assessment of the employment market also worsened, with the “jobs hard to get” index rising while the “jobs plentiful” index slipped. “There remain a lot of questions around the sustainability of economic growth. The median forecast called for a decline to 62.5, and the gauge was lower than all projections in a Bloomberg News survey of 71 economists.
The confidence report was at odds with last Friday’s consumer sentiment data from the Thomson Reuters/University of Michigan Surveys of Consumers. That survey showed sentiment in June rose to its highest since January 2008. Tuesday’s report comes just days ahead of the government’s monthly data on employment, one of the most widely watched economic indicators. The report this Friday is forecast to show non-farm payrolls fell in June in the United States, according to a Reuters’ survey.
Stocks retreated even after home prices in 20 U.S. cities rose in April from a year earlier as sales got a boost from a tax credit aimed at reviving the industry that triggered the worst recession since the 1930s. The S&P/Case-Shiller index of property values climbed 3.8% from April 2009, the biggest year-over-year gain since September 2006. The increase exceeded the median forecast of economists surveyed by Bloomberg News.
What is the outlook?
Unfortunately, stock markets need a catalyst to bottom out and resume some upward momentum. The catalyst must be an improved outlook as it relates to: 1) sovereign debt issues; 2) global growth; and 3) the employment market. These are all macro issues which will outweigh any positive micro or company specific developments. Conversely, stocks are currently not cheap enough in order to attract buyers in order to push stock markets up. Said differently, expect stocks to test new recent lows before investors come out to bargain hunt. In turn, expect interest rates to stay lower for longer than anticipated which will provide some stimulus to the overall economy while governments attempt to pull back their direct stimulus measures.
With time stocks will advance again on the assumption that credit markets and/or the financial system remains functional thereby, giving consumers, business and government’s access to credit on reasonable terms. A functioning capital market will provide the required resources to fund productivity growth and innovation which will translate into future profits.
This morning investors are looking a little more optimistic with stock futures and commodity prices looking up rebounding from a steep sell-off yesterday, as investors were comforted that European banks were less reliant on funding from the European Central Bank (ECB). Investors awaited a June employment report from Automatic Data Processing (ADP) at 8:15 a.m. EDT. Economists in a Reuters survey expected that 60,000 jobs were created in June versus 55,000 in May. At 8:30 a.m. EDT, the Institute for Supply Management (ISM) New York releases the June index of regional business activity while the Institute of Supply Management (ISM) Chicago releases its index of manufacturing activity at 9:45 a.m. EDT. Economists forecast a reading of 59.0 in the month versus 59.7 in May.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
