Markets tumble on weak manufacturing data in the US and China

Dow sank 360, decliners over advancers a big 7-1 & NAZ fell 81.  The MLP index dropped 6+ to the 352s & the REIT index lost 2+ to the 296s.  Junk bond funds were mixed & Treasuries rose.  Oil had profit taking (see below) & gold went higher.

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China’s official factory gauge fell to the lowest level in 3 years as monetary easing failed to revive old growth drivers, while measures for the euro area signaled a divergence in the German & French economies.  China’s official Purchasing Managers’ Index was 49.7 for Aug, matching the estimate & down from 50 in Jul.  Numbers below 50 indicate contraction, with small, medium & large enterprises all below that level last month.  A similar gauge for France fell to 48.3 from 49.6, while the German reading rose more than estimated to 53.3, according to Markit Economics.

The PMI data highlight the headwinds faced by the global economy, with the euro-area recovery remaining fragile & France’s struggle leaving Germany carrying more of the region’s burden.  The overall euro-area measure was at 52.3 in Aug, below the initial reading of 52.4.  A gauge of new orders rose to the highest in more than a year, while export demand also improved.  UK manufacturing growth cooled in Aug as export orders fell for a 5th month.  In its monthly factory report, Markit said companies blamed the decline in foreign demand on the strong £, weak sales in the euro area & the Chinese economic slowdown.  The headline manufacturing index slipped to 51.5 from 51.9 in Jul.  The People’s Bank of China last week lowered benchmark interest rates for the 5th time since Nov & allowed the yuan to devalue on Aug 11 in a move that should help bolster exports. With deepening factory gate deflation & sluggish external demand outside of the US market, manufacturers have yet to show a sustained response to the monetary easing.  The Shanghai Composite Index slid 1.2% to 3166.

The PBOC caused a stir in global markets by allowing the biggest yuan depreciation in 2 decades on Aug 11, when it changed the exchange-rate mechanism to give markets a bigger role in setting the currency’s level.  To fend off depreciation, the central bank has intervened in the onshore market.\

China Factory Gauge Shrinks to 3-Year Low

US manufacturing expanded in Aug at the slowest pace since May 2013 as anemic demand from emerging markets such as China translated into leaner factory order books.  The Institute for Supply Management’s index fell to 51.1, lower than the estimate, from 52.7 in Jul.  A measure of exports matched the weakest reading since Apr 2009.  The dollar’s ascent, which has accelerated since the middle of last year, is making it tougher for US producers to drum up overseas sales, prompting plants to slow hiring & production.  While factories are finding some relief with robust car sales & a recent rebound in investment in new equipment, record inventory building in H1 is an added hurdle.  Weak data for manufacturing surface ahead of the Fed's Sep policy meeting.  The US gauge is hovering above the reading of 50 that is the dividing line between expansion & contraction in the industries that make up 12% of the economy.  The forecast called for 52.5 in Aug.  The new orders gauge dropped to a more than 2-year low of 51.7 from 56.5 the prior month.  It marked the biggest decline since Jan, when shaky overseas economies & weaker business investment tied to a slowdown in the nation’s oil patch held factories back.  A measure of export orders decreased by 1.5 points to 46.5 in Aug, matching Jul 2012 as the lowest level since the depths of the recession.  The gauge has been in expansionary territory just once this year.  Global economic malaise is prompting factory managers to slow the pace of hiring.  The ISM’s employment index declined to a 4-month low of 51.2 from 52.7.  The report also showed the slowest rate of production growth since Feb 2014 as factories work off inventories, which shrank for a 2nd month.

American Factories Expand at Slowest Pace in More Than Two Years

Oil prices fell sharply after official data showed China's manufacturing sector, one of the main engines powering the world's biggest energy consumer, contracted at its fastest pace in 3 years.  The figures helped spur a retreat in oil prices after 3 days of hefty gains.  Investors took profits after Brent & US crude both soared more than 8% yesterday.  Figures from the Energy Information Administration (EIA) on Mon showed US oil output peaked at just above 9.6M barrels per day (bpd) in Apr before falling more than 300K bpd over the following 2 months.  But the global market is still heavily oversupplied.  Oil producers in OPEC are pumping over 2M bpd more than required, forecasters say, filling oil stockpiles worldwide.

Oil Falls on Weak China Factory Data

The new month begins with gloomy economic data around the globe.  The best case scenario for the bulls is this could give pause at the Fed when they talk about raising interest rates in 2 weeks.  The other side of the coin is that gloomy economic news is just plain gloomy & does not support a market advance.

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