Is the rally tapped out? It looks that way on Thursday morning after a triple-whammy of good news failed to nudge major equity indexes higher.
Soon after the start of trading, the S&P 500 was down 0.6 per cent, putting an end to what had been its best three-day winning streak this year. And Canada’s S&P/TSX composite index, comming off a six-day winning streak, was down 0.3 per cent. In Europe, Germany’s DAX index was down 0.5 per cent in afternoon trading.
Stocks have a habit of meandering independently of economic developments. But Thursday brought a rapid succession of news that would normally be supportive of stocks. The European Central Bank cut its key interest rate by a quarter percentage point, bringing the rate to 0.75 per cent – an historic low. China made a similar move: Its central bank cut its key rate lending rate and its deposit rate.
The two moves were made within 45 minutes of one another – and within that time span the Bank of England made a stimulative move of its own, increasing the size of its asset-purchase program.
“The actions had the look and feel of a co-ordinated global easing campaign,” Nick Kounis, head of macro research at ABN Amro Bank NV, told Bloomberg News. “The central banks are trying to arrest the synchronized slowdown in global economic growth that has taken shape.”
In the United States, where markets are waking up after the Independence Day holiday on Wednesday, there was upbeat economic news: The ADP report on private sector employment showed job gains of 176,000 in June, which was well above expectations and up about 40,000 from May. Although the relationship between the ADP report and the official payrolls report from the Labor Department – arriving on Friday morning – is spotty, it nonetheless raises optimism about employment, especially with weekly initial jobless claims retreating to 374,000 or the lowest in a month.
“The ADP survey suggests that, while not reaching the heights seen over the mild winter, hiring in the U.S. remains fairly robust,” said Andrew Grantham, an economist at CIBC World Markets, in a note. “A positive for stocks, negative for fixed income.”
He wrote that before North American stock markets opened. Soon after stocks began trading, investors were greeted with one disappointment: The ISM non-manufacturing index, which gives a reading on the massive U.S. services sector, fell to 52.1 in June from 53.7 in the previous month, which was a bigger-than-expected decline. Stocks slumped a little more after the report hit the wires.
If good news sends stocks down and bad news sends them down even more, it looks as though stocks are in for a rough day.
What’s the explanation? One possibility is that investors are now focusing their attention on the start of the U.S. second quarter earnings season. It is not likely to be a good one. As Bloomberg News has pointed out, operating earnings are expected to decline this quarter, marking the first contraction since 2009.
Another possibility: Investors normally love the idea of central bank stimulus. The idea of everyone working together in harmony builds the impression that smart people are on top of things. However, this co-ordinated action might be reflecting an ugly reality – that the global economy is in worse shape than the markets had believed. While that might not mean stocks are now going to swoon, it could be enough to snuff out what had been a decent rally.