Speculation that growth in China may be cooling sparked a ferocious sell off on Wall Street, with heavy-weight industrials and banking stocks hit the hardest.
An error in calculating the leading economic index for China in April resulted in a large downward revision in the forward-looking gauge, leading investors to speculate that China's GDP growth will be weaker than anticipated.
As written in this morning's report, the Conference Board's leading index for China was revised to show a 0.3% gain in April, down from a previously reported 1.7%. The error was due to their calculations on the use of floor space.
The news sparked a bout of panic selling across equities worldwide as investors speculated that the Chinese growth engine may be faltering. It also demonstrates how sensitive traders are to react to any negative news at the moment.
Fears of global growth stalling have been mounting for some time now, but the decision by the G20 to halve fiscal deficits over the next few years have added to those concerns. We received an indication today of how serious the ECB is on weaning banks off easy money, when they announced that they will not be renewing a €442 billion 12-month funding facility that expires this Thursday. In its place will be an unlimited 3-month liquidity facility which banks can access to roll-over funds. However, it is being said that not all banks that borrowed the €442 billion, at an interest rate of 1%, will roll over the funds, which essentially means that banks would have less money to lend out.
By 3:45pm (London time) the Dow Jones Industrial Average had lost 250.23 points (-2.53%) to 9888.29, the S&P 500 index shed 28.41 points (-2.72%) to 1046.16, while the tech-heavy NASDAQ 100 plunged 58.63 points (-3.3%) to 1777.37.
Adding a nail to the coffin was the US consumer confidence index, released by the Conference Board, the same board that made the calculation error on China's leading economic index this morning. According to their measure, US consumer confidence fell to a reading of 52.9 in June, well below the median forecast of 62.5 estimated by Bloomberg. This is in stark contrast to the Reuters/Michigan Consumer Sentiment Index that showed an increase in confidence in May, and reports today from the European Union that showed an increase in the region's economic confidence for June.
With US jobless claims due on Thursday and the all important non-farm payroll data scheduled for Friday, the market may experience further volatile sessions in the next few days.
In a separate report, the S&P/Case-Schiller Home Price Indices indicated that house prices in the US rose by more-than-expected to 3.8% in April. However, much of the gain in prices is thought to have been artificially inflated due to the government's incentive scheme which ended in April. The report itself commented that 'home prices do not yet show signs of sustained recovery'. [1]
Industrial majors Boeing, Caterpillar and General Electric were the three heaviest fallers on the Dow Jones, losing between 4.4% and 5.5%. These three companies are used by some investors as proxies for the health of the US economy, and the fact that they have been sold off today sends a clear signal that investors are losing confidence in the recovery.
Banks were also heavy losers today, with Citigroup , JP Morgan Chase, Morgan Stanley and Bank of America shedding between 3.1% and 3.9%. Investors are speculating that the death of Senator Robert Byrd may delay the implementation of the US financial reform bill, giving the banks some breathing space and a last-minute attempt for lobbyists to water down the final version of the bill. However this wasn't enough to lift sentiment towards US banks this afternoon. It appears as though the ECB's decision to not extend its €442 billion 12-month lending facility has had more of an impact.
A sharp fall in commodity prices punished resource stocks this afternoon. Alcoa lost 4.17% on the Dow Jones, while on the S&P500 Cliffs Natural Resources, AK Steel Holdings and Titanium Metals lost between 6.23% and 7.37%. On the FTSE 100, miners Rio Tinto, Xstrata, Vedanta and BHP had all lost around 6%.
Later tonight, the US ABC/Washington Post Consumer Confidence Index is due for release followed by the GfK Group's latest reading for UK consumer confidence.
Source: [1] S&P Website
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'Spread Betting News 29 Jun 2010', Article by IG Index, last update: 29-Jun-10
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