The U.S. stock markets rang in the New Year with solid losses, with another series of disappointing Chinese manufacturing data and escalating tensions in the Middle East as a backdrop to resurfacing global concerns. Treasuries were higher amid the downtrodden sentiment, with mixed reads on U.S. manufacturing output adding fuel to the negativity. In the meantime, crude oil prices were lower, while gold and the U.S. dollar were higher.
The Dow Jones Industrial Average (DJIA) tumbled 276 points (1.6%) to 17,149, the S&P 500 Index dropped 31 points (1.5%) to 2,013 and the Nasdaq Composite plunged 104 points (1.2%) to 4,903. In heavy volume, 1.1 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.28 to $36.76 per barrel, but wholesale gasoline gained $0.02 to $1.27 per gallon, while the Bloomberg gold spot price increased $13.81 to $1,074.91 per ounce. Elsewhere, the dollar index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 98.84.
Bloomberg is reporting that Dublin-based Shire PLC (O:SHPG) (SHPG $198) is in advanced talks to acquire Illinois-based drugmaker Baxalta Inc (N:BXLT) (BXLT $41) for about $32.0 billion in cash and stock in a deal that could be announced as soon as this week, per people familiar with the matter. According to the report, the final details of the transaction are still being negotiated and the timing and structure of any offer may change. Neither company has commented on the report. BXLT finished higher, while SHPG was solidly lower.
Acadia Healthcare Company Inc (O:ACHC). (ACHC $64) announced that it has reached an agreement to acquire U.K. behavioral healthcare services company Priory Group for about $1.9 billion in cash and stock. Shares of ACHC were higher.
Manufacturing activity mixed, kicking off the year and heavy week of data
The Institute for Supply Management (ISM) Manufacturing Index in December unexpectedly fell further into a level depicting contraction (below 50), declining to 48.2 from November's 48.6 level, and compared to the Bloomberg forecast calling for a modest rise to 49.0. This was the second-straight month of contraction, with employment falling below 50 and the contraction in prices accelerating, while new orders rose modestly but remained in contraction territory at 49.2.
The final Markit U.S. Manufacturing PMI Index was revised slightly lower to 51.2 from the 51.3 preliminary level for December, and versus expectations of a slight downward revision to 51.1. The index was down from the 52.8 level posted in November, though a reading above 50 denotes expansion. The release is independent and differs from ISM's manufacturing report, as it has less historic value and Markit weights its index components differently.
As noted in the recent Schwab Market Perspective: What Was, What Is, and What May Be, while manufacturing is important and shouldn’t be ignored, it represents only 12% of U.S. economic activity; while the export market is a relatively small part of overall gross domestic product (GDP). The services side of the economy (representing 88% of U.S. activity), in contrast, remained healthy throughout 2015 and looks to continue that performance entering 2016. Additionally, the U.S. consumer looks to be in good shape heading into the New Year.
Construction spending unexpectedly declined by 0.4% month-over-month (m/m) in November, versus projections of a 0.6% advance, and following the downwardly revised 0.3% increase seen in October. Residential spending rose 0.2%, while non-residential spending declined 0.8% m/m.
Treasuries finished higher, as the yields on the 2-Year and 10-Year notes, as well as the 30-Year bond all declined 3 basis points (bps) to 1.02%, 2.22% and 2.98%, respectively.
Tomorrow's economic calendar will be very light, with the only item of note being the release of domestic auto sales throughout the day.
Europe and Asia fall amid global growth concerns
European equities traded broadly lower, with global growth concerns being amplified by another round of lackluster Chinese manufacturing data. Also, global sentiment was hamstrung by heightened geopolitical concerns with tensions escalating in the Middle East as Saudi Arabia severed diplomatic ties with Iran over the weekend. The euro was lower versus the U.S. dollar and bond yields in the region lost ground. In economic news in the region, Markit's final Eurozone Manufacturing PMI Index for December was revised slightly higher to 53.2 from the preliminary level of 53, where economists had expected it to remain, and compared to November's 52.8 figure. A reading above 50 denotes expansion. Moreover, preliminary German consumer price inflation unexpectedly dipped in December. The benchmark Stoxx Europe 600 Index posted the worst start to the year ever, per Bloomberg, led by basic materials issues.
Stocks in Asia sold off broadly, led by a 6.9% tumble for the Shanghai Composite Index following a triggered trading halt during the session. A couple of lackluster Chinese manufacturing reports caused a flare-up in global economic growth concerns, while escalated tensions in the Middle East exacerbated sentiment. China's official Manufacturing PMI Index ticked higher to 49.7 in December, from 49.6 in November, and compared to the rise to 49.8 that was expected. Also, the Caixin/Markit China PMI Manufacturing Index declined to 48.2 last month, from the prior month's 48.6 figure, and versus the projected improvement to 48.9. Readings below 50 for both indexes denote contraction. Stocks in Hong Kong also lost ground, while a rally in the yen on the Chinese data pressured Japanese equities. Australian securities declined, but losses were limited by oil and gas issues, which gained ground on a rebound in oil prices on the Middle East tensions, while listings in India and South Korea also fell.
The international economic calendar will also be fairly quiet, as items slated for release include employment data from Germany, and CPI figures from Italy and the eurozone.
Schwab Center for Financial Research - Market Analysis Group
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