Stock Indexes Retreat As Fed Stimulus Hope Fades; Europe Slides On PMI Data

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Stock indexes tumbled with the Dow industrials posting its biggest fall in more than a month that also marked its fourth down day after global manufacturing data showed signs of slowdown and a US Fed official cast doubts over further accommodative policies soon.

The Dow Jones Industrial Average (DJIA) closed 115 points lower after losing as much as 126 points as breadth within the 30-component Dow turned overwhelmingly negative with 28 stocks ending in red.

Both the S&P 500 Index (SPX) and the tech-heavy NASDAQ Composite (COMP) tanked, down 0.8 percent and 0.7 percent respectively, which was long overdue as the indexes have done nothing but edge higher throughout August without any type of pullback. As I posted repeatedly, the only driver providing any type of momentum has been QE related hope.

Treasuries advanced with 10-year notes gaining for the fifth straight day after a sudden rise in initial jobless claims diminished risk appetite. The US economy, however, continued to send mixed signals with July new home sales beating economists’ forecasts.

The benchmark 10-year Treasury yields dropped two basis points to 1.67 percent after president of the Federal Reserve Bank of St. Louis said the minutes from the last FOMC meeting on July 31-Aug 1 were “stale” and further stimulus will be held back if economic data points became a little stronger.

30-year bond yields also declined two basis points to 2.79 percent in late afternoon trading, after flash HSBC-Markit PMI data showed manufacturing in China fell to a nine month low.

Meanwhile, stocks in Europe turned lower with the benchmark Stoxx Europe 600 index sliding 0.6 percent after flash PMI-Markit data from Europe showed manufacturing in the region contracted for the seventh month in a row. Today’s reading point to the EZ GDP falling to -0.5 percent in the third quarter, its worst in 3-1/2 years.

News agency Reuters reported Madrid has initiated bailout talks with its European partners over aid conditions designed to bring down its borrowing costs even though no formal decision has been taken to request a bailout.

The options being discussed involve Eurozone’s bailout funds buying Spanish bonds from the primary markets while the European Central Bank intervenes in the secondary market to boost confidence. Spain is looking forward to the September 6 ECB governing council meeting for more clarity on the central bank’s intervention plan, a spokeswoman for the Economic Ministry said.

Rift between Greece and Germany came out in the open after German finance minister Wolfgang Schaeuble said more time is not the solution to Athens’ problems, referring to Greece’s credibility crisis within the EU. Greek Prime Minister Antonis Samaras had sought a two-year extension to meet deficit reduction targets, arguing the austerity-wrecked economy needs more room to recover in the near-term.

In the ETF space, the iShares’ Silver Trust (SLV) rose 2.35 percent as precious metals managed to post decent gains. The SPDR Gold Trust (GLD) added 0.84 percent on the day as yellow metal prices hit a four month high after weak Chinese PMI data fuelled PBOC (People’s Bank of China) stimulus speculations. The Market Vectors Vietnam ETF (VNM) was among the biggest percentage decliners, shedding 6.28 percent on the day.

I will post the latest StatSheet along with all momentum numbers and TTI positions later on tonight.

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