Weak Manufacturing Survey Stokes Recession Fears

Market Report - October 4, 2019

Global equity markets dropped and bond yields fell after a widely watched U.S. manufacturing index slumped to its lowest level since June 2009. The Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI) slid below the 50 level, raising fears that the global weakness in factory activity, driven mainly by trade-war uncertainty, has now also dragged U.S. industry into contraction. Only a day later, the ISM’s services PMI hit a three-year low, missing all estimates, although it remained in expansion territory. It has been well understood for some time that U.S. manufacturing was feeling headwinds from the global slowdown, but investors were shocked nonetheless by the latest reading. The gloomier outlook boosted safe haven assets like gold, and pressed oil prices to an eight-week low. It is perhaps worth noting that the Markit PMI, a measure similar to the ISM PMI but constructed with a broader, more domestic U.S. focus and less sensitive to U.S. dollar strength, has held above 50 and has risen in the last two months. This week’s solid employment data, including a 50-year low unemployment rate, also suggested the outlook was not as bad as the PMIs suggested. By mid-day Thursday stocks started to recover as the weak PMIs began to be seen as likely ensuring an interest rate cut by the U.S. Federal Reserve in October.

Health care led declining sectors in the S&P/TSX Composite Index. This week, in addition to the usual cannabis stock culprits, specialty pharmaceutical maker Bausch Health Cos. Inc. was among the top detractors. The company’s stock plunged after it launched a patent infringement suit against Sandoz Inc., a division of drug giant Novartis AG. The energy sector, which is more than 10 times the size of health care in the TSX, weighed heaviest on benchmark’s performance. The price of crude retreated to well below the level it was at two weeks ago before it briefly spiked higher in reaction to the attack on Saudi production facilities. The financials sector, whose profitability tends to be hurt by lower interest rates, was also especially weak. The defensive staples, utilities, and communications services sectors made gains. The technology sector was strongest, led by gains in shares of Shopify Inc.

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The S&P 500 decline was led by energy and the interest rate-sensitive financials sector. Industrials and materials were also weak. Technology and health care moved higher. The defensive real estate, staples, and utilities sectors made small gains as government bond yields fast approached the lows of the August collapse.

European stock markets fell even more than those in North America, after the U.S. moved to impose tariffs on European goods, authorized by the World Trade Organization (WTO) because of European Union subsidies to Airbus SE. The action surprised many investors because similar levies against the United States and Boeing are expected to be authorized by the WTO in the coming months. Asian equity markets were also weak. Hong Kong stocks outperformed after an emergency rule banning face masks at public gatherings was seen as possibly cooling down the ongoing protests. Stock markets in mainland China closed for the annual “golden week” after the October 1 National Day celebration of the founding of the People’s

The BDYI global shipping index closed at 1,767 which is down on the week and up 39.02% for the year.The Vix fear index dropped to 17.04 as talk of a China/US deal was talked about and changed the mood to a more optimistic outlook and that is why the Dow J rose 372 points to 26,573 on Friday.

The cheapest gas price in Manitoba is 99.9 at the usual spots, the Costco’s in Winnipeg and the highest is 124.9 at, you guessed it, the Petro-Canada in Flin Flon. The cheapest gas price in Saskatchewan is 98.9 at Regina Cabs in Regina and the highest is 119.9 at the Esso in Saltcoats.

The WTI oil rice is sitting 53.01 and sitting at the same price as it was at the first week of January.

What’s ahead next week

Canada

• Housing starts (September)
• Building permits (August)
• Employment report (September)

U.S.

• Consumer, Producer Price Indices (September)
• Wholesale inventories (August)
• Import, Export Price Indices (September)
• University of Michigan Sentiment Index (October)  

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