Economic Reports Send U.S. Market Lower

European and U.S. equity markets were influenced by a number of important economic reports on Tuesday, which managed to turn around the market’s optimism observed on Monday. As such, the major indexes from the two regions, U.S. and Europe broke once again below the break-even line.

U.S. futures started heading lower after a report showed that confidence among U.S. consumers dipped yet again in June, as consumers are affected by the rising unemployment rate. The Conference Board’s sentiment index fell down to 49.3, even though the market expected a 55.4 read.

The market’s instant reaction to the report is not a big surprise, since 2/3 of the U.S. economy is driven by consumers and most market participants think that a possible recovery can only come if consumers spend. Moreover, the U.S. market was dragged lower as crude oil declined as much as $4 per barrel, or 5%, from the intra-day high it hit earlier on Tuesday.

Throughout the European session, a release showed that the U.K. economy contracted 2.4% in the first quarter, the strongest pace of contraction seen in the last five decades. Most of the downside revision came due to the construction sector, which contracted 6.9% in Q1, even though it was released at -2.4% in the previous estimates.

The service sector, which makes up about 70% of the U.K. economy, contracted 1.6% in the first quarter from the previous one. In the meantime, a report showed that the rate of inflation was negative in the Euro-area in June for the first time on record. To some extent, this had been widely expected by both the ECB and market participants.

On Tuesday, the Dow Jones Index fell 97.87 points (1.15%) to 8,431.51, while the S&P 500 index lost 10.02 points (1.08%) to 917.21

Crude oil for July delivery was recently trading at $69.80 per barrel, lower by $1.60.

Gold for July delivery was recently trading lower by $12.60 to $928.10.

Disclosure: No positions

Comments

[Mad Hedge F...:]

I think they are an accident waiting to happen here. I spent the evening with Dr. Janet Yellen, the president of the Federal Reserve Bank of San Francisco. She thinks that thanks to the government’s tax cuts and spending programs, we will be out of the recession by the end of this year. After massive inventory liquidation, the auto industry in particular is poised for a rebound. Financial markets are now in better condition than we imagined possible six months ago. However, the pace of the recovery will be frustratingly slow, and it could take several years to return to full employment. Since the majority of the Fed board members feel that inflation will be stuck at 2% for years to come, deflation presents a greater risk than inflation. We are not by any means out of the woods yet. Rising energy prices and interest rates are a potential drag on the economy. Commercial real estate is at the top of her worry list, as falling rents and capital values could create a downward spiral, further impairing the banks. China’s wishes for an alternate reserve currency are impractical. Answering questions as only a UC Berkeley professor can, she further confirmed my belief that we are looking at an “L” shaped recovery at best. However, she did pour some cold water on my idea that the TBT has further to run. “Inflation running up to untoward levels doesn’t make any sense,” she averred.

Jul 01 11:43 AM