Friday, March 22, 2019, 12:31 PM, EST
- German manufacturing data sends negative signal about growth
- Stocks lower today as investors rotate into bonds, defensives
- U.S. manufacturing PMI data was lower than expected at 52.5 (53.5 est.) as was services PMI, 54.8 vs. 55.5 est.
- However, existing home sales rose 5.51 million (+11.8%), above consensus of 5.10 million (+3.2%)
It seems the low growth/low yield environment might want to stick around a while. As we got started writing the Dow was having its worst day in two months, down 275 points within the first half-hour of trading and is lower by over 300 points currently. Stocks were weaker heading into the open after German economic data sparked new worries about Eurozone growth. German manufacturing PMI of 44.7 was far below the consensus of 48 and also below the 50 level that indicates growth. The release was a negative surprise to investors hoping for global growth, or at least that the slowdown in the region has hit bottom. European stocks fell and German 10-year bonds “the Bund”, fell into negative territory for the first time since October 2016. In the words of our own Long Island-based Brian Joyce: “a Dizzasta”.
Negative yields still boggle my mind and I think will be studied in future economics classes. Still, if you are paying someone to hold your cash safely for you, your view on stock returns can’t be all that good. Yields across the Eurozone also fell and the 10-Year treasury here stateside - already at weekly lows – fell sharply to 2.47%, the lowest in 14 months. The 2-10 Treasury yield spread (0.11%) is at its lowest level since December and earlier fell intraday to the lowest level since June 2007 before recovering.
According to Bloomberg, “Much of the source of the economic weakness appears to be external, with export orders -- particularly in manufacturing -- under pressure. Trade tensions, tariffs and weaker global growth are all taking a toll, with Germany feeling much of the pain. Japan, another export heavy economy, also reported a contraction in activity in its manufacturing sector.” One silver lining for domestic investors: US Manufacturing PMI of 53.5, released shortly after the open, was also lower than expected at 52.5 but still in growth territory. Services PMI was 54.8 vs. 55.5 estimated. Stocks were not in the mood and fell further on the release. Wholesale inventories rose 1.2% vs. the 0.1% estimate. That's the largest build in six years. In the growth part of the cycle that number might be good but right now it does not seem so positive.
One bright spot was existing home sales, which rose 5.51 million, an 11.8% gain, well above consensus (5.10 million, 3.2%). All in, the data looked a little less bad from the U.S. perspective and stocks rallied a bit on the home sales release. Remember, the U.S. exports a lower percentage of its GDP (12%) than Germany (47%) or Japan (17%) so a strong economy here can still offset some global sluggishness. Financials took it on the chin today, falling 2% and notching a second straight day as the worst performing S&P sector.m Blame the flattening yield curve. Higher yielding defensive sectors Utilities, Real Estate and Consumer Staples were the only ones in positive territory. Full details are in the table below. To end on a positive note, stocks are still up double digits year to date: Dow +10%, S&P 500 +13%, Russell 2000 +14%.
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Brian’s Technical Take
Global equities are taking a breather from a robust quarter of gains amidst renewed worries of slowing global growth. Dismal economic data out of Europe, in particular Germany, is raising fresh concerns that we have not yet seen the trough in economic activity. Only a few days ago we highlighted the constructive breakout in the German DAX Index above a five month resistance level, which is typically a bullish signal, however we specially highlighted the near term risks for new longs chasing the momentum trade. Despite the bullish breakout, we noted the DAX had run into the 200-day moving average, a very common resistance line on the initial test, just as its momentum readings were hovering around “overbought” levels (daily RSI = 70+).
The combination of a prior steep uptrend, a major resistance level (200-day sma), and buyer exhaustion is a recipe for profit taking and in this case a “false breakout”. After a 15% rebound off the December lows, the now 3.3% drawdown off this week’s 2019 highs is relatively modest. The DAX could see more downside without negating the broader constructive price action underway throughout Q1. Today’s poor data affirms what has been evident in 2H of 2018 – the global economy is slowing. Yet just three months ago in LATE December the FOMC unanimously voted for an eighth rate hike in 24 months, along with an unprecedented QT … on autopilot. Yes the committee is now in wait and see mode with no additional hikes forecasted for 2019, however the “dovish pivot” does not erase the egg on their face.
The Atlanta Fed’s latest GDPNow model is forecasting a 0.4% GDP for Q1. The grim outlook in Europe combined with central banks flipping from hawks to doves is driving global yields lower. The 10-year German bund has returned to negative territory for the first time since October 2016. Meanwhile the 10-year US Treasury yield has declined as much as 10bps to a low of 2.44% in today’ session alone. In our MIDDAY Update from three weeks ago on 2/26/19, we noted the TLT ETF (20-year duration treasury bonds) was on the cusp of a powerful move, up or down, based on the extreme narrow ranges. We measured the ranges to be at their narrowest, along with two other occasions, since coming out of the financial crisis. The two prior occasions were soon followed by the biggest monthly moves in more than ten years.
This time around the 10-year treasury yield has already fallen 30bps since 2/26, and more downside can be expected. The soft global economy and dovish central banks has rekindled the “search for yield” headlines that has been in the background during the great unwind over the last two years. Diverging central bank policies helped rate differentials widen to extremes with the 10-year Treasury-Bund spread reaching 30-year highs, 279 bps, just recently in November. The Q4 slowdown saw the treasury-bund spread narrow a steep 39bps over eight weeks’ time into early January as investors fled to safe haven treasuries. The sharp decline drove the daily MACD (momentum measure) to a seven year low, possibly signaling a major top was underway. The risk on sentiment in Q1 led to a temporary widening and allowed the MACD to reset from extreme lows and briefly return positive, but the downside has resumed and the MACD is back to negative. The price action over the last ten months has formed a large, common topping pattern (H&S) with key support (read neckline) at the 240 bps level.
A breakdown below there could cause the spread to narrow at an accelerating pace likely due to US yields falling faster than bunds. In that scenario it will be interesting to see whether or not the worst case scenario for stocks will be a healthy correction, or if a gloomier “retest of the lows” is in store. My bias is for the former and dips will be bought, however there are plenty of geopolitical and policy risks (China trade, auto tariffs, Brexit, etc.) that can swing things over the ensuing weeks and months.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.