Tags: US | PMI | emerging | markets

It's Not Yet Time to Buy the Dips

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Tuesday, 04 Feb 2014 11:12 AM Current | Bio | Archive

On Monday, the Institute for Supply Management (ISM) Purchasing Manufacturing Index came in at 51.3 percent, surprisingly below the 56.4 percent forecast and the lowest reading since May 2013.

To me, we remain in "expansion" territory (readings above 50 percent) with the January PMI indicating overall U.S. economy growing for the 56th consecutive month, which implies for the moment a 2.7 percent GDP annual growth rate. However, it could nevertheless be prudent to keep an eye on slowing numbers for production and employment (weather related?), with the latter coming in at 52.3, down 3.5 percentage points from the month before.

That said, I don't think these numbers alone have caused the market selloff in the United States, as the markets were already on their downward path before the ISM numbers were released.

Practically simultaneously, J.P. Morgan in association with ISM, Markit and the International Federation of Purchasing and Supply Management released their Global Manufacturing PMI, which came in 52.9 for January, down only a tick from December, but importantly showing growing divergences between the "developed" and "emerging" economies.

The United Kingdom remained on top of the manufacturing PMI list of the 32 surveyed economies. Second place Japan saw its PMI rise to a nearly eight-year high, while Germany experienced its highest PMI since May 2011. The United States slipped a couple of ranks mostly because of extreme winter weather related issues in January.

In the context of the markets' routs that are now going on in global equity markets, it could be good to take notice that, according to Bloomberg, volatility in the global markets have already wiped out $2.9 trillion in value so far this year.

China's economy is barely growing economy, as indicated by the latest HSBC Manufacturing PMI, which fell to 49.5 (in contraction territory) in January while the official PMI fell to 50.5 (barely in expansion territory).

The Federal Reserve's planned tapering of its long-term asset purchases as well as unrests/heighted tensions in various emerging markets from Thailand to Turkey to Ukraine, all together are for a serious part finger pointed as the main culprits for the recent turmoil in multiple markets.

Investors would do well to take notice that the lower half of the 32 economies ranked in the J.P. Morgan manufacturing PMI table is for the most part populated by emerging economies and of which the most important are China, Brazil, Russia, India and Indonesia.

From my side, I don't expect a sudden reversal for these emerging economies in the near future, which doesn't mean the situation couldn't get better further down the road once the actual "mini-storm" in these emerging economies has blown over. Of course, one of the main challenges will be the rising yield environment induced by rising Fed fund rates we will normally experience in the coming couple of years.

According to the latest overview of Federal Open Market Committee (FOMC) participants' assessments of appropriate monetary policy timing of firming, 12 of the 17 participants said 2015 was appropriate, with a majority pointing the 0.75 percent Fed funds' target rate zone as the most probable one.

In 2016, the most indicated Fed funds target rate zone by the same participants was in the 1.75 percent rate zone, which represents by itself a non-negligible total of 1.50 to 1.75 percent Fed funds' target rate hikes from where we are today as the Fed's target rate is actually 0 to 0.25 percent. Please keep in mind these Fed target rates are not predictions but estimates where they could be in the future.

I still don't think we are headed into a full-blown crisis/contagion caused by ongoing and unfortunately simultaneously economic/social/political troubles in various emerging economies.

That said, I have no doubt emerging economies will remain for some time to come in the "danger of contagion zone," which represents a serious risk factor for growth in the world as a whole, and that shouldn't be taken lightly.

Nevertheless, I don't think we are in a so-called "cliff" situation yet, but we could easily and relatively quickly move in that direction in case the emerging economies can't get their act together and be prepared, as soon as possible, for a higher (more normal!) U.S. yield environment.

No, you can't fight the Fed.

In my opinion, I wouldn't start buying the dips in the U.S. markets now, and this is strictly technical, the NYSE advance/decline (a/d) ratio on Jan. 24 was 6.48-1 negative and on Feb. 3 the NYSE a/d ratio was 5.73-1 negative. If the a/d ratio remains weaker we could see a bounce from the latest levels.

On the contrary, in case the a/d negative ratio should become stronger than the 6.48-1 negative of Jan. 24, then we could see significantly lower prices over the near term.

Anyway, I think, but of course I don't have a crystal ball, long-term investors should try to remain patient and wait for significant lower prices, which in my opinion are in the cards.

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HansParisis
Long-term investors should try to remain patient and wait for significant lower prices, which in my opinion are in the cards.
US,PMI,emerging,markets
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2014-12-04
Tuesday, 04 Feb 2014 11:12 AM
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